<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
VERNITRON CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
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4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
[Red Herring]
PRELIMINARY PROXY MATERIALS
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1995
OFFERING CIRCULAR AND CONSENT SOLICITATION
OFFER TO EXCHANGE
[Four] Shares of Common Stock
for
Each Outstanding Share Of Preferred Stock
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON [ ], [ ], 1995, UNLESS EXTENDED.
Vernitron Corporation, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this Offering
Circular and Consent Solicitation (the "Offering Circular") and in the
accompanying Consent and Letter of Transmittal, to exchange [four] shares of
Common Stock, par value $.01 per share (the "Common Stock"), of the Company for
each outstanding share of $1.20 Cumulative Exchangeable Redeemable Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of the Company (the
"Exchange Offer"). Concurrently with the Exchange Offer, pursuant to this
Offering Circular and the accompanying Consent and Letter of Transmittal, the
Company is also soliciting consents from holders of at least a majority of
the outstanding shares of Preferred Stock to an amendment (the "Preferred Stock
Amendment") to the amended and restated certificate of designation setting forth
the powers, preferences and rights of the Preferred Stock (as amended pursuant
to the Preferred Stock Amendment, the "Amended Preferred Stock").
IN ORDER TO ACCEPT THE EXCHANGE OFFER AND RECEIVE COMMON STOCK, HOLDERS OF
PREFERRED STOCK MUST BOTH TENDER THEIR SHARES AND CONSENT TO THE PREFERRED STOCK
AMENDMENT. MR. STEPHEN W. BERSHAD, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER OF THE COMPANY, BENEFICIALLY OWNS 138,462 SHARES OF PREFERRED STOCK,
REPRESENTING 18.4% OF THE OUTSTANDING SHARES OF PREFERRED STOCK. [HE HAS
ADVISED THE COMPANY THAT HE WILL TENDER ALL OF HIS SHARES AND CONSENT TO THE
PREFERRED STOCK AMENDMENT. AS A RESULT, IF AN ADDITIONAL 237,928 SHARES OF
PREFERRED STOCK (31.6% OF THE OUTSTANDING SHARES) ARE TENDERED, THE PREFERRED
STOCK AMENDMENT WILL BE APPROVED AND HOLDERS OF PREFERRED STOCK WHO HAVE NOT
TENDERED THEIR SHARES PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER WILL BE
SUBJECT TO THE PREFERRED STOCK AMENDMENT AND THEIR SHARES WILL BECOME SHARES OF
AMENDED PREFERRED STOCK].
Assuming 100% acceptance of the Exchange Offer by the holders of Preferred
Stock, the holders as a group will receive in exchange for their shares of
Preferred Stock newly issued shares of Common Stock representing in the
aggregate approximately [19.4%] of the outstanding shares of Common Stock after
giving effect to such issuance. The Common Stock which is currently outstanding
is quoted on the NASDAQ Small-Cap Market ("NASDAQ"), and the Common Stock
issuable in connection with the Exchange Offer is quoted thereon, subject to
official notice of issuance.
The consideration of [four] shares of Common Stock offered in the Exchange
Offer for each share of Preferred Stock represents a premium price to holders of
Preferred Stock based on the closing bid prices of the Common Stock and
Preferred Stock on [ ], 1995, the last trading day before the
announcement of the Exchange Offer. On that day the closing bid quotation
reported on NASDAQ was $[ ] per share for the Common Stock and $[ ]
per share for the Preferred Stock. On [ ], 1995, the last trading
day prior to the mailing of this Offering Circular, the closing bid quotation
reported on NASDAQ was $[ ] per share for the Common Stock and $[ ]
per share for the Preferred Stock. See "Purposes and Effects of Exchange Offer
and Preferred Stock Amendment; Recommendation of Board of Directors" and "Market
and Trading Information." There can be no assurance concerning the prices at
which the Common Stock or the Amended Preferred Stock might be traded following
the consummation of the Exchange Offer.
(COVER CONTINUED ON FOLLOWING PAGE)
The date of this Offering Circular and Consent Solicitation is , 1995.
<PAGE>
The market for the Common Stock is more liquid than the market for the
Preferred Stock, which has been sporadic and limited. During the twelve months
ended August 31, 1995, the Preferred Stock traded on only 53 trading days and
the average daily trading volume of the Preferred Stock was 648 shares. During
the six months ended August 31, 1995, the Preferred Stock traded on only 25 days
and the average daily volume declined to 213 shares. During August 1995, the
Preferred Stock traded on 5 days and average daily volume was 254 shares. In
contrast, during the twelve-month and six-month periods ended August 31, 1995,
the Common Stock traded on 112 and 57 days, respectively, and average daily
trading volume was 4,139 and 6,661 shares, respectively. During August, 1995,
the Common Stock traded on 12 days and average daily trading volume of the
Common Stock increased to 8,150 shares. The Company believes that if the
Transaction is not consummated, the liquidity of the Preferred Stock is likely
to continue to be limited and that, although there can be no assurance, the
market for the Common Stock will continue to be more liquid than the market for
the Preferred Stock. There can be no assurance concerning the trading volume of
the Amended Preferred Stock, or the prices at which the Amended Preferred Stock
might be traded, following the consummation of the Exchange Offer, although the
Company believes it is likely that, following the consummation of the Exchange
Offer, the trading volume of the Amended Preferred Stock will be substantially
less than that of the Preferred Stock and that any trades that occur will be at
a substantial discount to its liquidation value. Under certain circumstances,
following the consummation of the Exchange Offer, the Amended Preferred Stock
may be delisted and cease to be traded on NASDAQ. See "Exchange Offer --
Certain Effects of the Exchange Offer on the Market for the Preferred Stock;
Exchange Act Registration." STOCKHOLDERS ARE URGED TO OBTAIN CURRENT
INFORMATION WITH RESPECT TO THE SALES PRICES OF PREFERRED STOCK AND THE COMMON
STOCK.
The Transaction is intended, among other things, (i) to increase the
liquidity of holders of Preferred Stock by offering them the opportunity to
exchange their shares at a premium for shares of Common Stock, which represents
a more liquid investment than the Preferred Stock, (ii) to avoid a default in
the payment of cash dividends on the Preferred Stock commencing after March 1,
1996, (iii) to reduce significantly the non-cash accounting charge in respect of
the Preferred Stock dividend requirements, thereby increasing the earnings
allocable under generally accepted accounting principles to the Common Stock and
(iv) to increase the float of shares of Common Stock available for trading on
NASDAQ, thereby increasing its liquidity. See "Purposes and Effects of Exchange
Offer and Preferred Stock Amendment; Recommendation of Board of Directors."
THE PREFERRED STOCK AMENDMENT WOULD, AMONG OTHER THINGS, (1) REDUCE THE
LIQUIDATION PREFERENCE OF EACH SHARE OF PREFERRED STOCK FROM $8 PER SHARE TO
$[5] PER SHARE, (2) REDUCE THE ANNUAL DIVIDEND PAYABLE ON SHARES OF PREFERRED
STOCK FROM $1.20 PER SHARE TO $[0.40] PER SHARE, (3) EXTEND THE PERIOD DURING
WHICH THE COMPANY MAY PAY DIVIDENDS THEREON IN ADDITIONAL SHARES INSTEAD OF CASH
BEYOND MARCH 1, 1996 TO [MARCH 1, 2001], (4) REDUCE THE CONSIDERATION PAYABLE IN
THE EVENT OF AN OPTIONAL REDEMPTION OF THE PREFERRED STOCK AS A RESULT OF A
CHANGE IN THE FORMULA FOR CALCULATING THE OPTIONAL REDEMPTION PRICE AND (5)
REDUCE THE PRINCIPAL AMOUNT (FROM $8 TO $[5] PER SHARE OF AMENDED PREFERRED
STOCK) AND THE INTEREST RATE (FROM 15% OF PRINCIPAL AMOUNT TO [8]% OF PRINCIPAL
AMOUNT) OF THE JUNIOR DEBENTURES WHICH ARE ISSUABLE, AT THE OPTION OF THE
COMPANY, IN EXCHANGE FOR SHARES OF THE AMENDED PREFERRED STOCK. SEE "PREFERRED
STOCK AMENDMENT."
Holders of shares of Preferred Stock accepted for exchange will not receive
any dividend payment in respect of dividends accrued subsequent to August 15,
1995 (the last date on which dividends payable on the Preferred Stock were
paid), on shares of Preferred Stock tendered and accepted for exchange. No
separate payment is being made in respect of accrued and unpaid dividends on
shares of Preferred Stock tendered and accepted for exchange.
The Board of Directors of the Company has unanimously determined that the
transaction consisting of the exchange of [four] shares of Common Stock for each
outstanding share of Preferred Stock and the Preferred Stock Amendment pursuant
to the Exchange Offer is in the best interests of the Company and its
shareholders and has approved the Exchange Offer and solicitation of consents to
the Preferred Stock Amendment. THE BOARD OF DIRECTORS [UNANIMOUSLY (WITH MR.
BERSHAD ABSTAINING)] RECOMMENDS THAT HOLDERS OF PREFERRED STOCK TENDER THEIR
SHARES OF PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER AND CONSENT TO THE
PREFERRED STOCK AMENDMENT. See "Purposes and Effects of the Exchange Offer;
Recommendation of Board of Directors."
(COVER CONTINUED ON FOLLOWING PAGE)
ii
<PAGE>
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
The Exchange Offer is conditioned upon, among other things, (1) there being
validly tendered prior to the expiration of the Exchange Offer and not withdrawn
a majority of the outstanding shares of Preferred Stock and (2) there being
tendered, together with the tender of Preferred Stock pursuant to the Exchange
Offer, by the holders of a majority of the outstanding shares of Preferred Stock
valid and unrevoked consents to the Preferred Stock Amendment which have become
irrevocable and are sufficient to approve the Preferred Stock Amendment.
TENDERED SHARES OF PREFERRED STOCK MAY BE WITHDRAWN, AND TENDERED CONSENTS TO
THE PREFERRED STOCK AMENDMENT MAY BE REVOKED, AT ANY TIME UNTIL THE EXPIRATION
OF THE EXCHANGE OFFER.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company, therefore, will not pay any commission or other remuneration to any
broker, dealer, salesman or other person for soliciting tenders of the Preferred
Stock or consents to the Preferred Stock Amendment. Regular employees of the
Company, who will not receive additional compensation therefor, may provide
information to holders of the Preferred Stock concerning the Exchange Offer or
the solicitation of consents to the Preferred Stock Amendment.
The Company has made no arrangements and has no understanding with any
independent dealer, salesman or other person regarding the solicitation of
tenders or consents hereunder, and no person has been authorized by the Company
to give any information or to make any representation in connection with the
Exchange Offer, or the solicitation of consents to the Preferred Stock
Amendment, other than those contained herein and, if given or made, such other
information or representations must not be relied upon as having been
authorized. The delivery of this Offering Circular shall not, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof.
(COVER CONTINUED ON FOLLOWING PAGE)
iii
<PAGE>
The Exchange Offer is not being made to, nor will the Company accept
tenders from, holders of the Preferred Stock in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
TABLE OF CONTENTS
PAGE
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Purposes and Effects of the Exchange Offer . . . . . . . . . . . . . . . 10
Pro Forma Unaudited Financial Information. . . . . . . . . . . . . . . . 14
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 20
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The Preferred Stock Amendment; Amended Preferred Stock and
Amended Junior Debentures . . . . . . . . . . . . . . . . . . . . . . . 28
Security Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . 34
Market and Trading Information . . . . . . . . . . . . . . . . . . . . . 34
Certain Federal Income Tax Considerations. . . . . . . . . . . . . . . . 36
Shareholder Proposals. . . . . . . . . . . . . . . . . . . . . . . . . . 40
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . 40
Incorporation of Certain Documents by Reference. . . . . . . . . . . . . 41
Company 1994 Form 10-K . . . . . . . . . . . . . . . . . . . . . .Exhibit A
Company June 30, 1995 Form 10-Q. . . . . . . . . . . . . . . . . .Exhibit B
Preferred Stock Amendment. . . . . . . . . . . . . . . . . . . . . .Annex A
Description of Preferred Stock and Junior Debentures . . . . . . . .Annex B
Comparison of Company Securities . . . . . . . . . . . . . . . . . .Annex C
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS OFFERING CIRCULAR. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
iv
<PAGE>
THE SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, CONTAINED
ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS OFFERING CIRCULAR.
THE COMPANY
The Company is primarily engaged in the design, manufacture, distribution
and sale of electromagnetic sub-systems, specialty AC and DC motors, position
and pressure sensing components, connectors and the distribution and servicing
of precision ball bearings. The Company's products are manufactured primarily
for use in high reliability applications by businesses in the aerospace,
defense, communications, medical equipment, office equipment and industrial
markets.
Mr. Stephen W. Bershad, Chairman of the Board and Chief Executive Officer
of the Company, owns 5,685,157 shares of Common Stock, constituting 45.3% of the
outstanding shares of Common Stock. There are 12,538,012 shares of Common Stock
outstanding on the date of the Offering Circular and Consent Solicitation. Mr.
Bershad also owns 138,462 shares of Preferred Stock, constituting 18.4% of the
outstanding shares of Preferred Stock. There are 752,779 shares of Preferred
Stock outstanding as of the date of this Offering Circular and Consent
Solicitation.
[Mr. Bershad has informed the Company that he intends to exchange all of
the shares of Preferred Stock which he beneficially owns for shares of Common
Stock pursuant to the Exchange Offer and execute and tender consents approving
the Preferred Stock Amendment]. If the Exchange Offer is consummated, Mr.
Bershad will own [6,239,005] outstanding shares of Common Stock, comprised of
[553,848] shares of Common Stock issuable to him in exchange for his shares of
Preferred Stock tendered pursuant to the Exchange Offer and 5,685,157 shares of
Common Stock owned by Mr. Bershad as of the date hereof. Assuming 100%
acceptance of the Exchange Offer, the [6,239,005] shares of Common Stock will
represent approximately [40.1%] of the then outstanding shares, comprised of
approximately [3.5%] attributable to the shares of Common Stock issuable to Mr.
Bershad in exchange for his shares of Preferred Stock and [36.6%] attributable
to the 5,685,157 shares owned by him as of the date hereof. Mr. Bershad has
abstained in the vote of the Board of Directors approving the Exchange Offer and
Preferred Stock Amendment. Mr. Eliot M. Fried, a Director of the Company and a
Managing Director of Lehman Brothers Inc., which beneficially owns 2,318,705
shares of Common Stock, [has voted in favor of the Exchange Offer and Preferred
Stock Amendment]. See "Security Ownership."
The principal executive offices of the Company are located at 645 Madison
Avenue, New York, New York 10022, telephone number (212) 593-7900.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER AND PREFERRED STOCK AMENDMENT
The Exchange Offer, the issuance of Common Stock pursuant to the Exchange
Offer and the Preferred Stock Amendment (collectively, the "Transaction") are
designed overall to enhance the Company's financial condition and to facilitate
the continuing development of its businesses by providing management with
increased operational and financial flexibility. The Transaction is part of an
ongoing program to strengthen the capitalization of the Company which began in
July 1994 with the refinancing of the Company's bank indebtedness on attractive
terms to the Company and its stockholders and the issuance of an additional
$2,500,000 of common equity pursuant to a rights offering to the Company's
holders of Common Stock.
The Transaction is intended, among other things, (i) to increase the
liquidity of holders of Preferred Stock by offering them the opportunity to
exchange their shares at a premium for shares of Common Stock, which represents
a more liquid investment than the Preferred Stock, (ii) to avoid a default in
the payment of cash dividends on the Preferred Stock commencing after March 1,
1996, (iii) to reduce significantly the non-cash accounting charge in respect of
the Preferred Stock dividend requirements, thereby increasing the earnings
<PAGE>
allocable under generally accepted accounting principles to the Common Stock and
(iv) to increase the float of shares of Common Stock available for trading on
NASDAQ, thereby increasing its liquidity.
The consideration of [four] shares of Common Stock offered in the
Transaction for each share of Preferred Stock represents a premium price to
holders of the Preferred Stock. On [ ], 1995, the last trading day
before the announcement of the Transaction, the closing bid quotation reported
on NASDAQ for the Common Stock was $[ ] per share. The last sale of Common
Stock prior to the announcement of the Transaction as reported on NASDAQ
occurred on that date at a price of $[ ]. On [ ], 1995, the closing
bid quotation reported on NASDAQ for the Preferred Stock was $[ ] per
share. The last sale of Preferred Stock prior to the announcement of the
Transaction occurred on [that date] OR [ , 1995] at a price of $[
] per share. The redemption price for the Preferred Stock on [ ], 1995,
payable at the option of the Company, was $[ ] per share. Based on the
closing bid quotation for the Common Stock on [ ], 1995, the Common Stock
consideration offered in the Transaction represents a premium of [ ]% over
the closing bid quotation for the Preferred Stock on that date, a premium of [
]% over the last reported sale of Preferred Stock and a premium of [ ]% over
the optional redemption price of the Preferred Stock payable by the Company at
that time. There can be no assurance concerning the prices at which the Common
Stock might be traded following the consummation of the Transaction. See
"Market and Trading Information."
The market for the Common Stock is more liquid than the market for the
Preferred Stock, which has been sporadic and limited. During the twelve months
ended August 31, 1995, the Preferred Stock traded on only 53 trading days and
the average daily trading volume of the Preferred Stock was 648 shares. During
the six months ended August 31, 1995, the Preferred Stock traded on only 25 days
and the average daily volume declined to 213 shares. During August 1995, the
Preferred Stock traded on 5 days and average daily volume was 254 shares. In
contrast, during the twelve-month and six-month periods ended August 31, 1995,
the Common Stock traded on 112 and 57 days, respectively, and average daily
trading volume was 4,139 and 6,661 shares, respectively. During August 1995,
the Common Stock traded on 12 days and average daily trading volume of the
Common Stock increased to 8,150 shares. The Company believes that if the
Transaction is not consummated, the liquidity of the Preferred Stock is likely
to continue to be limited and that, although there can be no assurance, the
market for the Common Stock will continue to be more liquid than the market for
the Preferred Stock.
A significant purpose of the Transaction is to avoid a default in the
payment of cash dividends on the Preferred Stock commencing after March 1, 1996,
by retiring the Preferred Stock and, to the extent the Preferred Stock cannot be
retired in full, to extend, pursuant to the Preferred Stock Amendment, the
period during which dividends may be paid in kind instead of cash. The
Company's Credit Agreement prohibits the payment of cash dividends. The Company
expects that, whether or not the Exchange Offer is consummated, cash dividends
will not be declared or paid on the Preferred Stock in the foreseeable future.
In the event that cash dividends are not paid on the Preferred Stock after March
1, 1996 (and, as set forth above, it is unlikely that dividends will be
declared or paid on the Preferred Stock in the foreseeable future), the holders
of Preferred Stock are not entitled to any remedy under the terms of the
Preferred Stock Certificate other than certain limited voting rights. See
"Preferred Stock Amendment; Amended Preferred Stock and Amended Junior
Debentures" and "Credit Agreement."
The maximum number of shares of Common Stock offered for exchange by the
Company in the Exchange Offer represents approximately [19.4%] of the shares of
Common Stock which would be outstanding after giving effect to the issuance of
Common Stock in the Exchange Offer. By offering holders of Preferred Stock a
common equity stake in the Company, the Company is providing the holders with an
opportunity to participate in the potential long-term appreciation of the
Company's business, which the Company expects will be enhanced by the
improvement in its capital structure and increased financial flexibility as a
result of the consummation of the Transaction.
2
<PAGE>
CERTAIN CONSEQUENCES TO NON-TENDERING HOLDERS OF PREFERRED STOCK
If the requisite consents for the approval of the Preferred Stock
Amendment are received and the Preferred Stock Amendment becomes effective, each
share of Preferred Stock not tendered in the Exchange Offer will be subject to
the Preferred Stock Amendment and will become a share of Amended Preferred Stock
(as opposed to [four] shares of Common Stock which each tendering holder of
Preferred Stock will receive if the Exchange Offer is consummated), regardless
of whether holders of such Preferred Stock consented to the Preferred Stock
Amendment.
The Preferred Stock Amendment would, among other things, (1) reduce the
liquidation preference of each share of Preferred Stock from $8 per share to
$[5] per share, (2) reduce the annual dividend payable on shares of Preferred
Stock from $1.20 per share to $[0.40] per share, (3) extend the period during
which the Company may pay dividends thereon in additional shares instead of cash
beyond March 1, 1996 to [March 1, 2001], (4) reduce the consideration payable in
the event of an optional redemption of the Preferred Stock as a result of a
change in the formula for calculating the optional redemption price and (5)
reduce the principal amount (from $8 to $[5] per share of Amended Preferred
Stock) and the interest rate (from 15% of principal amount to [8]% of principal
amount) of the Junior Debentures which are issuable, at the option of the
Company, in exchange for shares of the Amended Preferred Stock.
After obtaining the requisite consents and upon the expiration of the
Exchange Offer, the Company will file the Preferred Stock Amendment with the
Secretary of State of the State of Delaware, which will become effective upon
the consummation of the Exchange Offer, such consummation to be evidenced by the
fact that the Company shall have accepted Preferred Stock in the Exchange Offer.
Holders of shares of Preferred Stock accepted for exchange will not receive any
dividend payment in respect of dividends accrued subsequent to August 15, 1995,
on shares of Preferred Stock tendered and accepted for exchange. No separate
payment is being made in respect of accrued and unpaid dividends on shares of
Preferred Stock tendered and accepted for exchange.
To the extent that shares of Preferred Stock are tendered and accepted in
the Exchange Offer, the Company anticipates that the trading market for shares
of Amended Preferred Stock will be even more limited than the trading market of
the Preferred Stock at present. See "Exchange Offer -- Certain Effects of the
Exchange Offer on the Market for the Preferred Stock; Exchange Act Registration"
and "Additional Information." The Company anticipates that, based on recent
quotations it has obtained for the Preferred Stock, among other reasons, any
trading prices of shares of Amended Preferred Stock immediately following the
consummation of the Exchange Offer and on a fully distributed basis are likely
to be substantially less than the $5 liquidation preference per share.
RECOMMENDATION OF BOARD OF DIRECTORS
In light of the benefits expected to be obtained by the Company and its
stockholders as set forth under "Purposes and Effects of the Exchange Offer and
Preferred Stock Amendment; Recommendation of Board of Directors -- Purposes and
Effects of Exchange Offer and Preferred Stock Amendment," the Board of Directors
of the Company has unanimously determined that the Transaction is in the best
interests of the Company and its stockholders and has approved the Exchange
Offer and solicitation of consents to the Preferred Stock Amendment. THE BOARD
OF DIRECTORS [UNANIMOUSLY (WITH MR. BERSHAD ABSTAINING)] RECOMMENDS THAT HOLDERS
OF PREFERRED STOCK TENDER THEIR SHARES OF PREFERRED STOCK PURSUANT TO THE
EXCHANGE OFFER AND CONSENT TO THE PREFERRED STOCK AMENDMENT.
RISK FACTORS
Prior to deciding whether to accept the offer of Common Stock in the
Exchange Offer, each holder of Preferred Stock should consider carefully all of
the information contained in this Offering Circular and Consent Solicitation,
including the factors described in "Risk Factors." For a discussion of certain
additional
3
<PAGE>
considerations relating solely to the retention of the Preferred Stock, which
will become the Amended Preferred Stock if the Exchange Offer is consummated,
see "Purposes and Effects of the Exchange Offer and Preferred Stock Amendment;
Recommendation of Board of Directors -- Certain Consequences to Non-Tendering
Holders of Preferred Stock."
THE EXCHANGE OFFER
The Exchange Offer . . . . . . [Four] shares of Common Stock in exchange for
each outstanding share of Preferred Stock.
Conditions to
Exchange Offer . . . . . . . . The Exchange Offer is conditioned upon, among
other things, (i) there being validly
tendered prior to the expiration of the
Exchange Offer and not withdrawn a majority
of the outstanding shares of Preferred Stock
(the "Minimum Tender Condition") and (ii)
there being tendered, together with the
tender of Preferred Stock pursuant to the
Exchange Offer, by the holders of a majority
of the outstanding shares of Preferred Stock
valid and unrevoked consents (the "Requisite
Consents") to the Preferred Stock Amendment
which have become irrevocable and are
sufficient to approve the Preferred Stock
Amendment (the "Minimum Consent Condition").
Dividends. . . . . . . . . . . The Company's policy is to retain earnings
for the foreseeable future for reinvestment
in its businesses. The Credit Agreement
prohibits the payment of cash dividends and
the redemption of capital stock. The Company
believes that any amendment to the Credit
Agreement, or any new agreement provided for
the extension or refinancing of borrowings
under the Credit Agreement, which matures on
July 20, 1998, is likely to prohibit the
payment of cash dividends and the redemption
of capital stock for the foreseeable future.
Accordingly, the Company does not expect to
be able to pay dividends in cash on the
Common Stock, Preferred Stock or Amended
Preferred Stock for the foreseeable future.
HOLDERS OF SHARES OF PREFERRED STOCK ACCEPTED
FOR EXCHANGE WILL NOT RECEIVE ANY DIVIDEND
PAYMENT IN RESPECT OF DIVIDENDS ACCRUED
SUBSEQUENT TO AUGUST 15, 1995, ON SHARES OF
PREFERRED STOCK TENDERED AND ACCEPTED FOR
EXCHANGE. NO SEPARATE PAYMENT IS BEING MADE
IN RESPECT OF ACCRUED AND UNPAID DIVIDENDS ON
SHARES OF PREFERRED STOCK TENDERED AND
ACCEPTED FOR EXCHANGE. See "The Exchange
Offer -- Dividends on Preferred Stock and
Amended Preferred Stock."
Certain Consequences
to Non-Tendering Holders
of Preferred Stock. . . . . . If the Requisite Consents are received and
the Preferred Stock Amendment becomes
effective, each share of Preferred Stock not
tendered in the Exchange Offer will be
subject to the Preferred Stock Amendment and,
as a result, will become a share of Amended
Preferred Stock, regardless of whether
holders of such Preferred Stock consented to
the Preferred Stock Amendment. Shares of
Preferred Stock will have such terms as set
forth in the Preferred Stock Certificate, as
amended by the Preferred Stock Amendment.
See "-- The Solicitation -- The Preferred
Stock Amendment" and "Purposes and Effects of
the Exchange Offerjand Preferred Stock
Amendment; Recommendation of the Board of
Directors -- Purposes and Effects of the
Exchange Offer -- Certain Consequences to
Non-Tendering Holders of Preferred Stock."
4
<PAGE>
THE SOLICITATION
Consents Required to
Adopt the Preferred Stock
Amendment . . . . . . . . . . The Preferred Stock Certificate requires the
consent of the holders of at least a majority
in number of the outstanding shares of
Preferred Stock, voting as a single class, to
approve the Preferred Stock Amendment. As of
the date of this Offering Circular, there
were 752,779 shares of Preferred Stock
outstanding which are entitled to one vote
per share with respect to the Preferred Stock
Amendment. As of such date, Mr. Bershad
beneficially owned 18.4% of the outstanding
shares of Preferred Stock. [Mr. Bershad has
informed the Company that he will vote all
shares of Preferred Stock which he
beneficially owns in favor of the Preferred
Stock Amendment]. AS A RESULT, IF AN
ADDITIONAL [237,928 SHARES OF PREFERRED STOCK
(31.6% OF THE OUTSTANDING SHARES)] ARE
TENDERED, THE PREFERRED STOCK AMENDMENT WILL
BE APPROVED AND HOLDERS OF PREFERRED STOCK
WHO HAVE NOT TENDERED THEIR SHARES PRIOR TO
THE EXPIRATION OF THE EXCHANGE OFFER WILL BE
SUBJECT TO THE PREFERRED STOCK AMENDMENT AND
THEIR SHARES WILL BECOME SHARES OF AMENDED
PREFERRED STOCK. See "Security Ownership."
The Preferred Stock
Amendment . . . . . . . . . . The Preferred Stock Amendment would, among
other things, (i) reduce the liquidation
preference of each share of Preferred Stock
from $8 per share to $[5] per share, (ii)
reduce the annual dividend payable on shares
of Preferred Stock from $1.20 per share to
$[0.40] per share, (iii) extend the period
during which the Company may pay dividends
thereon in additional shares instead of cash
beyond March 1, 1996 to [March 1, 2001], and
(iv) reduce the consideration payable in the
event of an optional redemption of the
Preferred Stock as a result of a change in
the formula for calculating the optional
redemption price, and (v) reduce the
principal amount (from $8 to $[5] per share
of Amended Preferred Stock) and the interest
rate (from 15% of principal amount to [8]% of
principal amount) of the Junior Debentures
(as amended, the "Amended Junior
Debentures"), which are issuable, at the
option of the Company, in exchange for shares
of Amended Preferred Stock. The Preferred
Stock Amendment would also, among other
things, (i) amend the provisions of the
Preferred Stock Certificate relating to the
Company's optional redemption rights to base
the definition of Fair Value Per Share on the
high bid price per share of Amended Preferred
Stock on any trading day included in the
relevant measurement period instead of the
average of high bid and low asked prices per
share of the Amended Preferred Stock, and
(ii) to permit the payment of dividends,
when, as and if declared by the Board of
Directors, annually instead of on a quarterly
basis as set forth in the Preferred Stock
Certificate. For a description of the terms
of the Preferred Stock Amendment, see "The
Preferred Stock Amendment; Amended Preferred
Stock and Amended Junior Debentures" and
Annex C to this Offering Circular.
Dividends on shares of the Amended Preferred
Stock payable on or prior to [March 1, 2001],
will be payable, at the option of the
Company, in cash or in additional shares of
Amended Preferred
5
<PAGE>
Stock. After [March 1, 2001], dividends on
the Amended Preferred Stock will be payable
solely in cash. In all cases, the payment of
dividends on the Amended Preferred Stock will
be subject to applicable statutory and
contractual restrictions, including those
contained in the Credit Agreement. Dividends
on outstanding shares of Amended Preferred
Stock will be cumulative and accrue
commencing from August 16, 1995 at [8]% per
annum.
Expiration Date. . . . . . . . The "Expiration Date" of the Exchange Offer
will be 5:00 p.m., New York City time, on
[ ], [ ], 1995, unless the Exchange
Offer is extended, in which case the term
"Expiration Date" shall mean the time on
the last date to which the Exchange Offer
is extended. References herein to the
"last Expiration Date" shall refer to the
time on the last date to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
How To Tender and
Consent in the
Exchange Offer. . . . . . . . A holder electing to tender Preferred Stock
in the Exchange Offer and consent to the
Preferred Stock Amendment should either (i)
complete and sign the Consent and Letter of
Transmittal, have the signatures thereon
guaranteed, if required by Instruction 4
thereof, and mail or deliver the Consent and
Letter of Transmittal with the Preferred
Stock and any other required documents to the
Exchange Agent at one of the addresses set
forth on the back cover page of this Offering
Circular, or effect a tender of Preferred
Stock pursuant to the procedures for book-
entry transfer as set forth under "The
Exchange Offer -- How to Tender and Consent
in the Exchange Offer," or (ii) request his
broker, dealer, commercial bank, trust
company or other nominee to effect the
transaction for him. Holders will not be
obligated to pay any brokerage commissions or
solicitation fees in connection with the
Exchange Offer. HOLDERS OF PREFERRED STOCK
WILL NOT BE ABLE TO VALIDLY TENDER THEIR
SHARES OF PREFERRED STOCK UNLESS THEY HAVE
CONSENTED TO THE PREFERRED STOCK AMENDMENT.
Tendered Preferred Stock may be withdrawn at
any time until the Expiration Date and, if
not otherwise accepted for exchange by the
Company, at any time after [ ], [ ],
1995. Consents to the Preferred Stock
Amendment may be revoked at any time prior
to the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders and
Revocation of Consents."
Acceptance of Preferred
Stock and Delivery of
Common Stock. . . . . . . . . Subject to the satisfaction or waiver of all
conditions of the Exchange Offer, the Company
will accept for exchange all Preferred Stock
validly tendered on or prior to the
Expiration Date. The Common Stock will be
delivered in exchange for the Preferred Stock
accepted in the Exchange Offer promptly after
acceptance on the Expiration Date. Upon the
effectiveness of the Preferred Stock
Amendment, certificates formerly evidencing
shares of Preferred Stock and not accepted in
the Exchange Offer shall, without further
action on the part of the Company or the
holder, evidence shares of Amended Preferred
Stock. See "The Exchange Offer -- General."
6
<PAGE>
Absence of
Appraisal Rights. . . . . . . Holders of Preferred Stock who do not consent
to the Preferred Stock Amendment will not
have appraisal or dissenters' rights under
applicable state law.
Federal Income Tax
Considerations. . . . . . . . For a discussion of certain Federal income
tax consequences of (i) the Exchange Offer
and Preferred Stock Amendment to tendering
holders and non-tendering holders of
Preferred Stock and (ii) the Exchange Offer
and the Preferred Stock Amendment to the
Company, see "Certain Federal Income Tax
considerations."
Common Stock . . . . . . . . . There are 20,000,000 shares of Common Stock
authorized for issuance, of which 12,538,012
shares were issued and outstanding on the
date of this Offering Circular. The maximum
number of shares of Common Stock offered for
exchange by the Company in the Exchange Offer
represents approximately [19.4]% of the
shares of Common Stock which would be
outstanding at such date, after giving effect
to the issuance of Common Stock in the
Exchange Offer. See "Description of Capital
Stock."
Market and
Trading Information . . . . . The Preferred Stock is currently quoted on
NASDAQ, although the trading volume of the
Preferred Stock has been sporadic and
limited. Under certain circumstances,
following the consummation of the Exchange
Offer, the Amended Preferred Stock may be
delisted and cease to be traded on NASDAQ.
See "Exchange Offer -- Certain Effects of the
Exchange Offer on the Market for the
Preferred Stock; Exchange Act Registration."
On [ ], 1995, the last trading day
before the announcement of the Transaction,
the closing bid quotation reported on NASDAQ
for the Preferred Stock was $[ ] per share.
On [ ], 1995, the last trading day
prior to the mailing of this Offering
Circular, the closing bid quotation reported
on NASDAQ for the Preferred Stock was $[
] per share. Bid quotations do not
necessarily represent actual transactions or
the value of the Preferred Stock. See
"Market & Trading Information." There can be
no assurance concerning the trading volume of
the Preferred Stock, or the prices at which
the Preferred Stock might be traded,
following the Exchange Offer if the Exchange
Offer is not consummated.
The outstanding Common Stock is quoted on
NASDAQ and the Common Stock issuable in
connection with the Exchange Offer quoted
thereon, subject to official notice of
issuance. On [ ], 1995, the last
trading day before the announcement of the
Transaction, the closing bid quotation
reported on NASDAQ for the Common Stock was
$[ ] per share. On [ ], 1995, the
last trading day prior to the mailing of this
Offering Circular, the closing bid quotation
for the Common Stock reported on NASDAQ was
$[ ] per share. See "Market and Trading
Information". THERE CAN BE NO ASSURANCE
CONCERNING THE PRICES AT WHICH THE COMMON
STOCK MIGHT BE TRADED FOLLOWING THE
CONSUMMATION OF THE EXCHANGE OFFER.
7
<PAGE>
Stockholders are urged to obtain current
information with respect to the sales prices
of Preferred Stock and the Common Stock.
Information Agent. . . . . . . MacKenzie Partners, Inc. is serving as
Information Agent in connection with the
Exchange Offer. Its telephone number is
(212) 929-5500 or (800) 322-2885 (toll free).
Requests for additional copies of the
Offering Circular and the Consent and Letter
of Transmittal should be directed to the
Information Agent at one of its addresses set
forth on the back cover of this Offering
Circular.
Exchange Agent;
Further Information . . . . . Chemical Bank has been appointed as Exchange
Agent for the Exchange Offer. Requests for
additional copies of this Offering Circular,
the Consent and Letter of Transmittal or any
other documents furnished herewith should be
directed to the Exchange Agent at its address
and telephone number set forth on the back
cover page of this Offering Circular. For
further information, contact Mr. Elliot
Konopko, Vice President of the Company, at
Vernitron Corporation, 645 Madison Avenue,
New York, New York 10022, telephone (212)
593-7900.
8
<PAGE>
RISK FACTORS
Prior to deciding whether to accept the offer of Common Stock in the
Exchange Offer, each holder of Preferred Stock should consider carefully all of
the information contained in this Offering Circular, including the factors
described or cross-referenced in the following paragraphs. For a discussion of
certain additional considerations relating solely to the retention of the
Preferred Stock, which will become the Amended Preferred Stock if the Exchange
Offer is consummated, see "Purposes and Effects of the Exchange Offer and
Preferred Stock Amendment; Recommendation of Board of Directors -- Certain
Consequences to Non-Tendering Holders of Preferred Stock."
CHANGE IN PREFERENCE AND PRIORITY; CHANGE IN VOTING RIGHTS; CERTAIN LIMITATIONS
The Preferred Stock has preference over the Common Stock with respect to
the payment of dividends and upon liquidation, dissolution or winding-up of the
Company. If the Exchange Offer is consummated, the Preferred Stock owned by
holders who elect to exchange their shares in the Exchange Offer will be
converted into Common Stock and, thus, holders of Preferred Stock will
relinquish their preference with respect to the payment of dividends and upon
liquidation, dissolution or winding-up of the Company and instead will have no
preference, the same as all other holders of Common Stock. Shares of Amended
Preferred Stock outstanding after the Exchange Offer will have priority over the
Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company under certain circumstances.
In any liquidation or reorganization of the Company under the United States
Bankruptcy Code, the Common Stock, as equity securities of the Company, would
not represent bankruptcy claims ranking prior to other equity securities and
would rank below all debt claims, such as claims by the lender under the Credit
Agreement, and all preferred stock claims, such as the Preferred Stock, would
rank below all debt claims.
The authorized capital stock of the Company after the Exchange Offer will
include 4,000,000 shares of preferred stock. The Board of Directors will be
authorized to provide for the issuance of such preferred stock in one or more
series and to fix the designations, preferences, powers and relative,
participating, optional or other rights and restrictions thereof. Accordingly,
although the Company does not presently intend to issue any shares of preferred
stock other than the Amended Preferred Stock, the Company may issue one or more
series of preferred stock in the future that will have preference over the
Common Stock and/or the Amended Preferred Stock with respect to the payment of
dividends and upon liquidation, dissolution or winding-up of the Company or
otherwise. See "Description of Capital Stock."
Each share of Common Stock entitles the holder thereof to one vote on all
matters on which shareholders of the Company are entitled to vote, including the
election of directors. The Preferred Stock has no voting rights, except that,
if, at any time, dividends on the Preferred Stock are not paid for six quarters,
the Company's Board of Directors will be increased by one-third (but not less
than two directors) and the holders of the Preferred Stock will be entitled to
elect the directors to fill such newly created directorships. In addition, the
affirmative vote of the holders of at least a majority of the outstanding shares
of Preferred Stock, voting as a class, is required for the authorization of
changes, by amendment to the Company's Certificate of Incorporation or
otherwise, to the terms and provisions of the Preferred Stock so as to adversely
affect the rights and preferences of the Preferred Stock.
DIVIDENDS
The Company's policy is to retain earnings for the foreseeable future for
reinvestment in its businesses. The Credit Agreement prohibits the payment of
cash dividends on the Common Stock and Preferred Stock and, if the Exchange
Offer is consummated, the Amended Preferred Stock. Under the terms of the
Preferred Stock and Amended Preferred Stock, the payment of dividends is subject
to applicable statutory and contractual restrictions. See "The Credit Agreement
-- Restrictive Covenants."
9
<PAGE>
Under the terms of the Preferred Stock, dividends on the Preferred Stock
payable on or prior to March 1, 1996, may, at the option of the Company, be paid
in cash or in additional shares of Preferred Stock. After March 1, 1996,
dividends on the Preferred Stock may be paid only in cash. Under the terms of
the Amended Preferred Stock, dividends on shares of Amended Preferred Stock
payable on or prior to March 1, 2001 will be payable, at the option of the
Company, in cash or additional shares. After March 1, 2001 dividends on the
Amended Preferred Stock will be payable only in cash.
Any dividends on outstanding shares of Preferred Stock or Amended Preferred
Stock paid in additional shares are expected to be taxable to the recipient at
their fair market value on the date of payment even though no cash is received.
See "Certain Federal Income Tax Consequences."
Under Delaware law, dividends may be paid on the Common Stock, Preferred
Stock or Amended Preferred Stock if, after giving effect to a dividend, the
dividend would not exceed the amount of the Company's surplus at the time of
payment or, if there is no surplus, the dividend would not exceed the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER AND PREFERRED
STOCK AMENDMENT; RECOMMENDATION OF BOARD OF DIRECTORS
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER AND PREFERRED STOCK AMENDMENT
The Exchange Offer, the issuance of Common Stock pursuant to the Exchange
Offer and the Preferred Stock Amendment (collectively, the "Transaction") are
designed overall to enhance the Company's financial condition and to facilitate
the continuing development of its businesses by providing management with
increased operational and financial flexibility. The Transaction is part of an
ongoing program to strengthen the capitalization of the Company which began in
July 1994 with the refinancing of the Company's bank indebtedness on attractive
terms to the Company and its stockholders and the issuance of an additional
$2,500,000 of common equity pursuant to a rights offering to the Company's
holders of Common Stock.
The Transaction is intended, among other things, (i) to increase the
liquidity of holders of Preferred Stock by offering them the opportunity to
exchange their shares at a premium for shares of Common Stock, which represents
a more liquid investment than the Preferred Stock, (ii) to avoid a default in
the payment of cash dividends on the Preferred Stock commencing after March 1,
1996, (iii) to reduce significantly the non-cash accounting charge in respect of
the Preferred Stock dividend requirements, thereby increasing the earnings
allocable to the Common Stock and (iv) to increase the float of shares of Common
Stock available for trading on NASDAQ, thereby increasing its liquidity.
The consideration of [four] shares of Common Stock offered in the
Transaction for each share of Preferred Stock represents a premium price to
holders of the Preferred Stock. On [ ], 1995, the last trading day
before the announcement of the Transaction, the closing bid quotation reported
on NASDAQ for the Common Stock was $[ ] per share. The last sale of Common
Stock prior to the announcement of the Transaction as reported on NASDAQ
occurred on that date at a price of $[ ]. On [ ], 1995, the
closing bid quotation reported on NASDAQ for the Preferred Stock was $[ ]
per share. The last sale of Preferred Stock prior to the announcement of the
Transaction occurred on [that date] OR [ , 1995] at a price of
$[ ] per share. The redemption price for the Preferred Stock on
[ ], 1995, payable at the option of the Company, was $[ ] per
share. BASED ON THE CLOSING BID QUOTATION FOR THE COMMON STOCK ON
[ ], 1995, THE COMMON STOCK CONSIDERATION OFFERED IN THE
TRANSACTION REPRESENTS A PREMIUM OF [ ]% OVER THE CLOSING BID QUOTATION FOR
THE PREFERRED STOCK ON THAT DATE, A PREMIUM OF [ ]% OVER THE LAST REPORTED
SALE OF PREFERRED STOCK AND A PREMIUM OF [ ]% OVER THE OPTIONAL REDEMPTION
PRICE OF THE PREFERRED STOCK PAYABLE BY THE COMPANY AT THAT TIME. Obviously,
there can be no assurance concerning the prices at which the Common Stock
might be traded following the consummation of the Transaction. See "Market and
Trading Information."
10
<PAGE>
The market for the Common Stock is more liquid than the market for the
Preferred Stock, which has been sporadic and limited. During the twelve months
ended August 31, 1995, the Preferred Stock traded on only 53 trading days and
the average daily trading volume of the Preferred Stock was 648 shares. During
the six months ended August 31, 1995, the Preferred Stock traded on only 25 days
and the average daily volume declined to 213 shares. During August 1995, the
Preferred Stock traded on 5 days and average daily volume was 254 shares. In
contrast, during the twelve-month and six-month periods ended August 31, 1995,
the Common Stock traded on 112 and 57 days, respectively, and average daily
trading volume was 4,139 and 6,661 shares, respectively. During August, 1995,
the Common Stock traded on 12 days and average daily trading volume of the
Common Stock increased to 8,150 shares. The Company believes that if the
Transaction is not consummated, the liquidity of the Preferred Stock is likely
to continue to be limited and that, although there can be no assurance, the
market for the Common Stock will continue to be more liquid than the market for
the Preferred Stock.
A significant purpose of the Transaction is to avoid a default in the
payment of cash dividends on the Preferred Stock commencing after March 1, 1996,
by retiring the Preferred Stock and, to the extent the Preferred Stock cannot be
retired in full, to extend, pursuant to the Preferred Stock Amendment, the
period during which dividends may be paid in kind instead of cash. The
Company's Credit Agreement (as hereinafter defined) prohibits the payment of
cash dividends. Although, as set forth below, the Company's obligation to
declare and pay dividends, whether in kind or in cash, is subject to any
contractual restrictions prohibiting the payment of such dividends and the
holders of Preferred Stock have no remedy for the failure to pay such dividends
other than limited voting rights, the failure to pay cash dividends commencing
after March 1, 1996 would, the Company believes, negatively affect its ability
to raise financing in both the private and public markets and, accordingly, the
Company believes it is in the best interest of the Company and its stockholders
to avoid such a default. The Company expects that, whether or not the Exchange
Offer is consummated, cash dividends will not be declared or paid on the
Preferred Stock in the foreseeable future. All dividends on the Preferred Stock
paid through August 15, 1995 (the last date on which dividends payable on the
Preferred Stock were paid) were paid in additional shares of Preferred Stock.
Under the terms of the amended certificate of designation setting forth the
powers, preferences and rights of the Preferred Stock (the "Preferred Stock
Certificate"), dividends on the Preferred Stock payable on or prior to March 1,
1996, may, at the option of the Company, if declared by the Board of Directors,
be paid in cash or in additional shares of Preferred Stock. After March 1,
1996, dividends on the Preferred Stock, if declared by the Board of Directors,
may be paid only in cash. In all cases, the payment of dividends is subject to
applicable statutory and contractual restrictions. Under the terms of the
Company's Credit Agreement, the payment of cash dividends is prohibited through
July 20, 1998, the expiration date of the Credit Agreement, and any amendment to
the Credit Agreement, or any new agreement providing for the extension or
refinancing of borrowings under the Credit Agreement, is likely to prohibit the
payment of cash dividends for the foreseeable future. See "Credit Agreement."
In the event that cash dividends are not paid on the Preferred Stock after
March 1, 1996 (and, as set forth above, dividends will not be declared or paid
on the Preferred Stock in the foreseeable future), the holders of Preferred
Stock are not entitled to any remedy under the terms of the Preferred Stock
Certificate other than the limited voting rights described below. In addition,
by the terms of the Preferred Stock Certificate, holders of Preferred Stock do
not have any mandatory redemption right at any time. However, under the terms
of the Preferred Stock Certificate, if at any time dividends on the Preferred
Stock are not paid for six quarters, the Company's Board of Directors will be
increased by one-third (but not less than two directors) and the holders of the
Preferred Stock, voting separately as a single class, will be entitled to elect
the directors to fill such newly created directorships. Because the Preferred
Stock Amendment, if approved and effective, would, among other things, extend
the period during which the Company may pay dividends in additional shares
instead of cash, a probable effect of the approval and effectiveness of the
Preferred Stock Amendment upon the consummation of the Exchange Offer will be to
delay the right of holders of Preferred Stock to elect directors under such
circumstances. See "Preferred Stock Amendment; Amended Preferred Stock and
Amended Junior Debentures" and "Credit Agreement."
In the event of the non-payment of cash dividends on the Preferred Stock,
the Company will be required under generally accepted accounting principles to
record a non-cash charge to earnings in the amount of such unpaid dividends. By
eliminating or reducing the Preferred Stock outstanding, the consummation of the
Transaction will be anti-dilutive
11
<PAGE>
and increase the earnings allocable to the Common Stock. See "Pro Forma
Unaudited Information" for the pro forma effects of the Transaction on earnings
per share allocable to the Common Stock.
The Company believes that the Transaction will increase the number of
shares of Common Stock held by shareholders other than stockholders owning 5% or
more of the Common Stock, thereby increasing the number of shares available for
trading on NASDAQ (the "float"). As of the date of this offering, the ownership
of the Common Stock is concentrated. Approximately 75% of the outstanding
shares of Common Stock are beneficially owned by four persons or entities and
the float is correspondingly small, or approximately 3,100,000 shares. As a
result of the Transaction, assuming 80% acceptance of the Exchange Offer, the
float should increase by approximately [2,400,000] shares, or by approximately
[77]%. See "Security Ownership." Although the Common Stock represents a more
liquid investment than the Preferred Stock, the Company believes that the
trading prices of the Common Stock has been negatively affected by the
relatively small float of Common Stock. The actual liquidity of the Common
Stock and the prices at which it trades in the future will depend upon the
results of operations, financial condition and prospects of the Company, the
market capitalization of the Common Stock, the continuing interest of securities
firms in making a market in the Common Stock and other factors.
The maximum number of shares of Common Stock offered for exchange by the
Company in the Exchange Offer represents approximately [19.4]% of the shares of
Common Stock which would be outstanding after giving effect to the issuance of
Common Stock in the Exchange Offer. By offering holders of Preferred Stock a
common equity stake in the Company, the Company is providing the holders with an
opportunity to participate in the potential long-term appreciation of the
Company's business, which the Company expects will be enhanced by the
improvement in its capital structure and increased financial flexibility as a
result of the consummation of the Transaction. The Company believes that its
inability to pay cash dividends on the Preferred Stock, together with the
illiquidity of the market for shares of the Preferred Stock, the lack of any
mandatory redemption rights, the limited rights and preferences of the Preferred
Stock as to dividends and the other terms of the Preferred Stock, will
negatively affect the value of the Preferred Stock should the Transaction not be
effected.
By its terms, the Common Stock does not entitle the holders thereof to any
of the rights which the Preferred Stock entitles the holders thereof, such as,
among other rights, priority over the Common Stock with respect to the payment
of dividends and the distribution of assets in the event of a liquidation of the
Company under certain circumstances. However, the Common Stock entitles the
holders thereof to vote generally in the election of directors, unlike the
Preferred Stock, which entitles the holders thereof to a vote only to elect one
third of the directors of the Company in the event dividends are not paid for
six quarters.
CERTAIN CONSEQUENCES TO NON-TENDERING HOLDERS OF PREFERRED STOCK
If the requisite consents for the approval of the Preferred Stock
Amendment are received and the Preferred Stock Amendment becomes effective, each
share of Preferred Stock not tendered in the Exchange Offer will be subject to
the Preferred Stock Amendment and will become a share of Amended Preferred Stock
(as opposed to four shares of Common Stock which each tendering holder of
Preferred Stock will receive if the Exchange Offer is consummated), regardless
of whether holders of such Preferred Stock consented to the Preferred Stock
Amendment.
The Preferred Stock Amendment would, among other things, (1) reduce the
liquidation preference of each share of Preferred Stock from $8 per share to
$[5] per share, (2) reduce the annual dividend payable on shares of Preferred
Stock from $1.20 per share to $[0.40] per share, (3) extend the period during
which the Company may pay dividends thereon in additional shares instead of cash
beyond March 1, 1996 to [March 1, 2001], (4) reduce the consideration payable in
the event of an optional redemption of the Preferred Stock as a result of a
change in the formula for calculating the optional redemption price and (5)
reduce the principal amount (from $8 to $[5] per share of Amended Preferred
Stock) and the interest rate (from 15% of principal amount to [8]% of principal
amount) of the Junior Debentures which are issuable, at the option of the
Company, in exchange for shares of the Amended Preferred Stock.
After obtaining the requisite consents and upon the expiration of the
Exchange Offer, the Company will file the Preferred Stock Amendment with the
Secretary of State of the State of Delaware, which will become effective upon
the
12
<PAGE>
consummation of the Exchange Offer, such consummation to be evidenced by the
fact that the Company shall have accepted Preferred Stock in the Exchange Offer.
Holders of shares of Preferred Stock accepted for exchange will not receive any
dividend payment in respect of dividends accrued subsequent to August 15, 1995,
on shares of Preferred Stock tendered and accepted for exchange. No separate
payment is being made in respect of accrued and unpaid dividends on shares of
Preferred Stock tendered and accepted for exchange.
To the extent that shares of Preferred Stock are tendered and accepted in
the Exchange Offer, the Company anticipates that the trading market for shares
of Amended Preferred Stock will be even more limited than the trading market of
the Preferred Stock at present. See "Exchange Offer -- Certain Effects of the
Exchange Offer on the Market for the Preferred Stock; Exchange Act Registration"
and "Additional Information." The Company anticipates that, based on recent
quotations it has obtained for the Preferred Stock, among other reasons, any
trading prices of shares of Amended Preferred Stock immediately following the
consummation of the Exchange Offer and on a fully distributed basis are likely
to be substantially less than the $5 liquidation preference per share.
RECOMMENDATION OF BOARD OF DIRECTORS
In light of the benefits expected to be obtained by the Company and its
stockholders as set forth above under "-- Purposes and Effects of the Exchange
Offer and Preferred Stock Amendment," the Board of Directors of the Company has
unanimously determined that the Transaction is in the best interests of the
Company and its stockholders and has approved the Exchange Offer and
solicitation of consents to the Preferred Stock Amendment. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS (WITH MR. BERSHAD ABSTAINING) THAT HOLDERS OF
PREFERRED STOCK TENDER THEIR SHARES OF PREFERRED STOCK PURSUANT TO THE EXCHANGE
OFFER AND CONSENT TO THE PREFERRED STOCK AMENDMENT.
13
<PAGE>
PRO FORMA UNAUDITED FINANCIAL INFORMATION
The Pro Forma Unaudited Condensed Consolidated Statements of
Operations for the year ended December 31, 1994 and the six months ended June
30, 1995 are based on the historical financial statements of the Company and
have been prepared to give effect to the Exchange Offer and the Preferred Stock
Amendment, as if each had been consummated January 1, 1994 and January 1, 1995,
respectively. The Pro Forma Unaudited Condensed Consolidated Balance Sheet at
June 30, 1995 is based on historical financial statements of the Company and has
been prepared to give effect to the Exchange Offer and the Preferred Stock
Amendment as if it had become effective June 30, 1995. The adjustments giving
effect to the Exchange Offer assume acceptance of the Exchange Offer by holders
of the Preferred Stock owning 80% of the outstanding shares of Preferred Stock.
There are certain conditions to the Company's obligation to consummate the
Exchange Offer. See "The Exchange Offer -- Conditions." The pro forma
financial information does not purport to be indicative of the results which
would actually have been obtained had such transactions been completed as of the
assumed dates and for the periods presented or which may be obtained in the
future and should be read in conjunction with the Consolidated Financial
Statements of the Company and the related notes appearing in the Company 1994
Form 10-K attached and the Company's Quarterly Report on Form 10-Q, dated August
4, 1995, for the quarter ended June 30, 1995, attached as Exhibit B to this
Offering Circular (the "Company June 30, 1995 Form 10-Q").
14
<PAGE>
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 84 $ 84
Accounts receivable - net 9,489 9,489
Inventories 15,768 15,768
Other current assets 616 616
-------- -------- --------
TOTAL CURRENT ASSETS 25,957 25,957
PROPERTY, PLANT AND EQUIPMENT - net 7,751 7,751
EXCESS OF COST OVER NET ASSETS ACQUIRED - net 6,728 6,728
NET ASSETS HELD FOR DISPOSAL 1,204 1,204
OTHER ASSETS 462 462
-------- -------- --------
-------- -------- --------
TOTAL ASSETS $ 42,102 $ 42,102
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,282 $ 55 (b) $ 5,337
Current portion of long-term debt 5,617 5,617
Accrued expenses and other liabilities 592 592
-------- -------- --------
TOTAL CURRENT LIABILITIES 11,491 55 11,546
LONG-TERM DEBT, less current portion 12,727 12,727
OTHER LONG-TERM LIABILITIES 3,017 3,017
DEFERRED INCOME 585 585
SHAREHOLDERS' EQUITY:
$1.20 Cumulative Exchangeable Redeemable Preferred Stock
Preferred Stock ($8 Per Share Liquidation Value) 5,800 (5,800)(a) -
Amended Preferred Stock ($5 Per Share Liquidation Value) 725 (a) 725
Common Stock 125 23 (a) 148
Capital in Excess of Par 8,565 5,052 (a) 13,562
(55)(b)
Accumulated Deficit (since December 31, 1991) (208) (208)
-------- -------- --------
TOTAL COMMON SHAREHOLDERS' EQUITY 8,482 5,020 13,502
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 14,282 (55) 14,227
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,102 $ - $ 42,102
-------- -------- --------
-------- -------- --------
BOOK VALUE PER COMMON SHARE $ 0.68 $ 0.91
-------- -------- --------
-------- -------- --------
</TABLE>
15
<PAGE>
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 SIX MONTHS ENDED JUNE 30, 1995
---------------------------------------- ----------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 62,132 $ 62,132 $ 33,750 $ 33,750
Cost of sales 44,903 44,903 24,424 24,424
Selling, general and
administrative expenses 13,343 13,343 7,125 7,125
Restructuring/inventory
writedown charges 1,315 1,315 -
Amortization of intangible assets 209 209 104 104
-------- -------- -------- -------- -------- --------
OPERATING INCOME 2,362 2,362 2,097 2,097
Interest expense 2,264 2,264 1,037 1,037
Other expense 54 54 15 15
-------- -------- -------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES AND
EXTRAORDINARY GAIN 44 44 1,045 1,045
Charge in lieu of taxes 17 17 408 408
-------- -------- -------- -------- -------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY GAIN 27 27 637 637
Discontinued Operations:
Loss from operations,
net of tax benefit (143) (143)
Loss on disposal,
net of tax benefit (2,059) (2,059)
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN (2,175) (2,175) 637 637
Extraordinary gain on debt
repurchase, net of tax 5,856 5,856 -
-------- -------- -------- -------- -------- --------
NET INCOME 3,681 3,681 637 637
Preferred stock dividends 355 (355) (c) - 258 (258) (c) -
58 (d) 58 29 (d) 29
-------- -------- -------- -------- -------- --------
NET INCOME APPLIED TO
COMMON SHAREHOLDERS' EQUITY $ 3,326 $ 297 $ 3,623 $ 379 $ 229 $ 608
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net Income (Loss) per common share:
Continuing operations $ (0.04) $ - $ 0.03 $ 0.04
Discontinued operations (0.26) (0.20) - -
Extraordinary gain 0.69 0.54 - -
-------- -------- -------- --------
-------- -------- -------- --------
Total $ 0.39 $0.34 $ 0.03 $ 0.04
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares
oustanding: 8,509 10,829 12,538 14,858
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
16
<PAGE>
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) Assumes an 80% acceptance of the Exchange Offer, pursuant to which
each share of Preferred Stock is exchanged for [four] shares of Common
Stock. Each share of Preferred stock that is not exchanged for Common
Stock pursuant to the Exchange Offer would become one share of Amended
Preferred Stock upon the effectiveness of the Preferred Stock
Amendment. The pro forma adjustment gives effect to 20% of the
outstanding shares of Preferred Stock (144,987 shares as of June 30,
1995) becoming Amended Preferred Stock having a liquidation preference
of $5 per share. On a pro forma basis, the Amended Preferred Stock is
recorded at its liquidation preference of $5 per share.
Assuming 80% acceptance of the Exchange Offer as of June 30, 1995,
there will be outstanding, immediately after the consummation of the
Exchange Offer, 14,857,807 shares of Common Stock (based on 12,538,012
shares of Common Stock outstanding immediately prior to consummation
of the Exchange Offer and 2,319,795 shares of Common Stock issuable
pursuant to the Exchange Offer) and 144,987 shares of Amended
Preferred Stock.
(b) Assumes the incurrence of $55,000 in costs relating to the exchange
transaction.
(c) Amount represents elimination of dividends on the Preferred Stock.
(d) Amount represents pro forma dividends on the Amended Preferred Stock
of $.40 per share per annum payable in additional shares of Amended
Preferred Stock recorded at their liquidation preference of $5 per
share. Dividends paid on Amended Preferred Stock in additional shares
of Amended Preferred Stock following the consummation of the Exchange
Offer will be recorded at their fair market values at the times of
payment.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
concerning the Company and its subsidiaries for the fiscal years ended December
31, 1994, 1993 and 1992 and the six months ended June 30, 1995 and 1994. This
selected financial data should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing in the Company
1994 Form 10-K and the Company June 31, 1995 Form 10-Q attached hereto. The
data under the captions "Operating Data" and "Balance Sheet Data" for each of
the fiscal years have been derived from consolidated financial statements for
those years which have been audited by Arthur Andersen LLP, independent
auditors. The data for the quarters ended June 30, 1995 and 1994 is unaudited
but, in the opinion of management, includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------- -------------------
1994 1993 1992 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $62,132 $58,649 $62,912 $33,750 $30,765
Income (loss) from continuing operations
before taxes and extraordinary gain (1) 44 (3,856) (1,015) 1,045 412
Income (loss) from discontinued operations (2,202) (670) 1,144 (118)
Extraordinary gain 5,856
Net income (loss) 3,681 (4,526) 102 637 133
Preferred stock dividends 355 375 158 258 150
Net income (loss) applied to common
shareholders' equity 3,326 (4,901) (56) 379 (17)
Net income (loss) per share:
Continuing operations $ (0.04) $ (0.82) $ (0.23) $ 0.03 $ 0.02
Discontinued operations (0.26) (0.13) 0.22 (0.02)
Extraordinary gain 0.69
------- ------- ------- ------- -------
Total $ 0.39 $ (0.95) $ (0.01) $ 0.03 $ -
------- ------- ------- ------- -------
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital (2) $11,538 $15,473 $18,715 $14,466 $(7,476)
Total assets 42,197 47,261 52,247 42,102 48,070
Total assets less excess of cost over
net assets acquired 35,365 40,220 44,997 35,374 41,133
Total debt 12,363 26,470 26,920 13,319 26,206
Common shareholders' equity (4) 7,890 452 5,636 8,482 301
OTHER DATA:
EBITDA (3) $ 5,365 $ 3,621 $ 2,978 $ 2,862 $ 2,425
Ratio of EBITDA to Interest 2.37 1.56 1.15 2.76 1.93
<FN>
(1) Net income from continuing operations before taxes and extraordinary gain
for the years ended December 31, 1994 and 1993 reflect restructuring/
inventory writedown charges of $1,315,000 and $3,500,000, respectively,
related to the Company's Motion Control group. See Note 8 to the Company's
consolidated financial statements appearing in the
18
<PAGE>
Company 1994 Form 10-K attached hereto. No such charges were incurred
during the six-month periods ended June 30, 1995 and 1994.
(2) Net of the current portion of long-term debt of $442,000, $1,200,000 and
$1,000,000 at December 31, 1994, 1993, and 1992, respectively, and $592,000
and $24,706,000 at June 30, 1995 and 1994, respectively.
(3) EBITDA is earnings from continuing operations before interest, taxes,
depreciation and amortization. EBITDA and the ratio of EBITDA to Interest
are presented because together they are a widely accepted financial
indicator of a company's ability to incur and service debt. For purposes
of such calculations, restructuring/inventory charges relating to the
Company's Motion Control Group (See Note (1) above) have been excluded due
to their unusual nature.
(4) Common shareholders' equity is calculated as total shareholders' equity
less the liquidation value of the Preferred Stock.
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For Management's Discussion and Analysis of Financial Condition and Results
of Operations for the years ended December 31, 1994 and 1993 and the quarter and
six month periods ended June 30, 1995 and June 30, 1994, see Item 7 of the
Company 1994 Form 10-K and Item 2 of the Company June 30, 1995 Form 10-Q
attached hereto.
BUSINESS
For a description of the business of the Company, see Item 1 of the Company
1994 Form 10-K attached.
PROPERTIES
For a description of the properties of the Company, see Item 2 of the
Company 1994 10-K attached hereto.
LEGAL PROCEEDINGS
For a description of legal proceedings relating to the Company, see Item 3
of the Company 1994 Form 10-K attached hereto.
20
<PAGE>
THE EXCHANGE OFFER
THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Offering
Circular and in the accompanying Consent and Letter of Transmittal, the Company
is offering in the Exchange Offer to issue [four] shares of Common Stock for
each outstanding share of Preferred Stock.
The Company is soliciting (the "Solicitation") the Requisite Consents
(I.E., valid and unrevoked consents to the Preferred Stock Amendment of holders
of at least a majority of the outstanding shares of Preferred Stock which have
become irrevocable and are sufficient to approve the Preferred Stock Amendment).
See "The Preferred Stock Amendment." ONLY HOLDERS OF PREFERRED STOCK WHO
CONSENT TO THE PREFERRED STOCK AMENDMENT WILL BE ABLE TO VALIDLY TENDER THEIR
SHARES OF PREFERRED STOCK IN THE EXCHANGE OFFER.
The Company will make no separate payment for consents to the Preferred
Stock Amendment ("Consents") delivered in connection with the tender of shares
of Preferred Stock pursuant to the Exchange Offer. All references herein to the
Exchange Offer shall be deemed to include the solicitation of Consents, unless
otherwise specified.
This Offering Circular and the Consent and Letter of Transmittal are first
being mailed to holders on or about [ ], 1995.
GENERAL
As of [ ], 1995, there were outstanding 752,779 shares of Preferred
Stock having an aggregate liquidation preference of $6,022,232 and an optional
redemption value, payable solely at the option of the Company, of approximately
$[4,660,000].
The Company shall be deemed to have accepted validly tendered Preferred
Stock in the Exchange Offer and validly delivered Consents in the Solicitation
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the consenting and
tendering holders of Preferred Stock for the purposes of receiving the Common
Stock from the Company.
The Common Stock will be delivered in exchange for Preferred Stock accepted
in the Exchange Offer promptly after acceptance on the Expiration Date. The
Company's obligation to accept Preferred Stock for exchange and to accept
delivered Consents is subject to the satisfaction of the conditions set forth
below under "--Conditions."
Holders of Preferred Stock who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Consent and Letter of Transmittal, transfer taxes with respect to the
exchange of Preferred Stock for Common Stock pursuant to the Exchange Offer.
The Company will pay all charges and expenses, other than certain applicable
taxes, in connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
[ ], [ ], 1995, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the time on the last date to which the Exchange Offer is extended. References
herein to the "last Expiration Date" shall refer to the time on the last date to
which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period or on a daily basis.
21
<PAGE>
The Company expressly reserves the right, in its sole discretion, at any
time and from time to time, to (i) delay accepting any Consents or Preferred
Stock, to extend the Exchange Offer or to terminate the Exchange Offer and not
accept Consents or Preferred Stock not previously accepted if any of the
conditions set forth herein under " -- Conditions" shall exist or shall have
occurred and shall not have been waived or satisfied by the Company, by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (ii) waive any such condition or amend the terms of the Exchange Offer
in any respect. Any such delay in acceptance, extension, termination, amendment
or waiver will be followed as promptly as practicable by public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose each
amendment in a manner reasonably calculated to inform the holders of such
amendment and the Company will extend each such amended Exchange Offer for a
period which the Company in its discretion deems appropriate, depending upon the
significance of the amendment and the manner of disclosure to holders of the
Preferred Stock, if such amended Exchange Offer would otherwise expire during
such period. Any such extension shall be in compliance with the applicable
rules and regulations of the Securities and Exchange Commission (the
"Commission").
Subject to applicable law (including Rule 13e-4(e)(2) under the Exchange
Act which requires that material changes be promptly disseminated to holders in
a manner reasonably calculated to inform them of such change) and without
limiting the manner in which the Company may choose to make a public
announcement, if any, of any extension, amendment, waiver or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
If, prior to the Expiration Date, the Purchaser should decide to decrease
the number of shares of Preferred Stock being sought or to increase or decrease
the consideration being offered in the Exchange Offer and, at the time notice of
any such decrease or increase in the number of shares of Preferred Stock being
sought or of such decrease or increase in the consideration being offered is
first published, sent or given to holders of such shares, the Exchange Offer is
scheduled to expire at any time earlier than the period ending on the tenth
business day from and including the date that such notice is first so published,
sent or given, the Exchange Offer will be extended at least until the expiration
of such ten business day period. For purposes of the Exchange Offer, a
"business day" means any day, other than a Saturday, Sunday or federal holiday,
and consists of the time period from 12:01 a.m. through 12:00 midnight, New York
City time.
DIVIDENDS ON PREFERRED STOCK AND AMENDED PREFERRED STOCK
Holders of shares of Preferred Stock accepted for exchange will not receive
any dividend payment in respect of dividends accrued subsequent to August 15,
1995 (the date the last dividend payable on the Preferred Stock was paid), on
shares of Preferred Stock tendered and accepted for exchange. No separate
payment is being made in respect of accrued and unpaid dividends on shares of
Preferred Stock tendered and accepted for exchange. Dividends on shares of the
Amended Preferred Stock payable on or prior to March 1, 2001, shall be payable,
at the option of the Company, in cash or additional shares of Amended Preferred
Stock. After March 1, 2001, dividends on shares of the Amended Preferred Stock
shall be payable solely in cash. In all cases, the payment of dividends shall
be subject to applicable statutory and contractual restrictions, and holders of
Amended Preferred Stock shall be entitled to dividends thereon only when, as and
if declared by the Board of Directors of the Company. Dividends on the Amended
Preferred Stock shall be cumulative and shall accrue commencing August 16, 1995
at the rate of 8% per annum.
HOW TO TENDER AND CONSENT IN THE EXCHANGE OFFER
HOLDERS OF PREFERRED STOCK WILL NOT BE ABLE TO VALIDLY TENDER THEIR SHARES
OF PREFERRED STOCK UNLESS THEY HAVE CONSENTED TO THE PREFERRED STOCK AMENDMENT.
A holder electing to tender Preferred Stock in the Exchange Offer or consent to
the Preferred Stock Amendment should either (i) complete and sign the consent
portion of the Consent and Letter of Transmittal (and, if tendering Preferred
Stock in the Exchange Offer, all other portions of the Consent and Letter of
Transmittal), or a facsimile thereof (indicating thereon whether such holder is
delivering a Consent), and mail or otherwise deliver the completed Consent and
Letter of Transmittal, or such facsimile, together with certificates for shares
of Preferred Stock, if such shares are being tendered in the Exchange
22
<PAGE>
Offer, and any other required documents to the Exchange Agent at one of its
addresses set forth on the back cover page of this Offering Circular or effect
the tender of Preferred Stock pursuant to the procedure for book-entry transfer
as set forth below, or (ii) request his broker, dealer, commercial bank, trust
company or other nominee to effect the transaction and/or consent for him.
Under Delaware law, Consents to the Preferred Stock Amendment will not be
effective unless within 60 days after the date of the earliest dated Consent
delivered to the Company the Requisite Consents are received by the Company. In
the event the Requisite Consents are not received within such 60 day period, the
Company may resolicit the Consents, but no assurance can be given that such
resolicitation will be made or, if made, will be successful.
The term "holder" with respect to the Preferred Stock means any person in
whose name shares of Preferred Stock are registered on the books of the Company
or any other person who has obtained a properly completed stock power (or, in
the case of a Consent only, a proxy) from the registered holder.
In order for a tender of Preferred Stock to constitute a valid tender,
holders should complete and deliver the Consent and Letter of Transmittal to the
Exchange Agent on or prior to the Expiration Date.
TENDERS AND CONSENTS -- GENERAL
The tender or consent by a holder of Preferred Stock pursuant to one of the
procedures set forth herein will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Consent and Letter of Transmittal.
The method of delivery of the Preferred Stock, Consent and Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of each holder. Except as otherwise provided herein, such
delivery will be deemed made only when actually received by the Exchange Agent.
INSTEAD OF EFFECTING DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO DOCUMENTS SHOULD BE SENT TO THE COMPANY
OR THE TRANSFER AGENT FOR THE PREFERRED STOCK.
The Exchange Agent will make a request promptly after the date of this
Offering Circular to establish accounts with respect to the Preferred Stock at
the Depository Trust Company ("DTC"), the Midwest Securities Transfer Company
("MSTC") and the Philadelphia Depository Trust Company ("PHILADEP", and together
with DTC and MSTC, collectively referred to as the "Book Entry Transfer
Facilities") for the purpose of facilitating the Exchange Offer. Any financial
institution that is a participant in any of the Book Entry Transfer Facilities
systems may make book entry delivery of the Preferred Stock by causing DTC, MSTC
or PHILADEP to transfer such Preferred Stock into the Exchange Agent account in
accordance with such Book Entry Transfer Facility's procedure for such transfer.
Although delivery of Preferred Stock may be effected through book entry transfer
into the Exchange Agent's account at DTC, MSTC or PHILADEP, the Consent and
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at one of its addresses at
set forth on the back cover of this Offering Circular prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO A BOOK ENTRY
TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
Any beneficial holder whose shares of Preferred Stock are registered in the
name of his broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender Preferred Stock and consent to the Preferred Stock
Amendment should contact such registered holder promptly and instruct such
registered holder to tender Preferred Stock and consent to the Preferred Stock
Amendment on his behalf. If such beneficial holder wishes to tender Preferred
Stock and consent to the Preferred Stock Amendment on his own behalf, such
beneficial holder must (i) in the case of a tender with respect to shares of
Preferred Stock, either make appropriate arrangements to register ownership of
the Preferred Stock in such holder's name or obtain a properly completed stock
power from the registered holder reflecting the change in ownership or (ii) in
the case of a Consent, obtain a proxy from the registered holder authorizing the
beneficial holder to vote Preferred Stock on behalf of such registered holder.
The transfer of record ownership of Preferred Stock may take considerable time
and, depending on when such transfer is requested, may not be accomplished prior
to the Expiration Date.
23
<PAGE>
Signatures on each Consent and Letter of Transmittal must be guaranteed
unless the shares of Preferred Stock delivered pursuant thereto are delivered
(i) by a registered holder of Preferred Stock who has NOT completed the boxes on
the Consent and Letter of Transmittal entitled "Special Issuance and Delivery
Instructions" or (ii) for the account of an Eligible Institution (as defined
below). In the event that signatures are required to be guaranteed, such
guarantees must be by a firm that is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or by a commercial bank or trust company having an office in the
United States (an "Eligible Institution").
If the Consent and Letter of Transmittal is signed by a person other than
the registered holder, such certificate(s) must be endorsed or accompanied by
appropriate stock powers (or in the case of a Consent only, proxies) bearing the
signature of the registered holder or holders exactly as the name or names
appeared on the certificate(s).
If the Consent and Letter of Transmittal or any other certificates, stock
powers or proxies are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Preferred Stock and
delivered Consents will be resolved by the Company, whose determination will be
final and binding. The Company reserves the absolute right to reject any and
all tenders and withdrawals of Preferred Stock and deliveries and revocations of
Consents that are not in proper form or the acceptance of which would, in the
opinion of the Company or counsel for the Company, be unlawful. The Company
also reserves the right to waive any irregularities or conditions of tender or
consent as to particular shares of Preferred Stock. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Consent and Letter of Transmittal) will be final and
binding. Unless waived, any irregularities in connection with tenders and
withdrawals of Preferred Stock and deliveries and revocations of Consents must
be cured within such time as the Company shall determine. Neither the Company
nor the Exchange Agent shall be under any duty to give notification of defects
in such tenders, withdrawals, deliveries or revocations or shall incur any
liability for failure to give such notification. Tenders and withdrawals of
Preferred Stock and deliveries and revocations of Consents will not be deemed to
have been made until such irregularities have been cured or waived. Any shares
of Preferred Stock received by the Exchange Agent that are not properly tendered
or delivered and as to which the irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders of Preferred
Stock unless otherwise provided in the Consent and Letter of Transmittal as soon
as practicable following the Expiration Date.
Although it does not expect to do so, in the event the Company should
increase the consideration offered for the Preferred Stock in the Exchange
Offer, such increased consideration will be paid to all holders whose shares of
Preferred Stock are accepted in the Exchange Offer, including those shares of
Preferred Stock tendered before the announcement of the increase. If the terms
of the Preferred Stock Amendment are made more beneficial than those initially
proposed hereby and the Preferred Stock Amendment becomes effective, then the
rights of all holders of Preferred Stock who have not exchanged their shares in
the Exchange Offer will be governed by the Preferred Stock Amendment, as
modified.
GUARANTEED DELIVERY PROCEDURES
If a holder of Preferred Stock desires to tender shares of Preferred Stock
and the certificate(s) representing such shares are not immediately available,
or time will not permit such holder's certificate(s) or other required documents
to reach the Exchange Agent before 5:00 p.m., New York City time, on the
Expiration Date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, a tender may be effected if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by telegram,
24
<PAGE>
telex, facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder of Preferred Stock and the number of shares of Preferred
Stock to be delivered, stating that the delivery is being made thereby and
guaranteeing that within five New York Stock Exchange trading days after the
Expiration Date, the certificate(s) representing the Preferred Stock, the
Consent and Letter of Transmittal and any other documents required thereby will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) the certificate(s) for all tendered Preferred Stock, or a confirmation
of a book entry transfer of such Preferred Stock into the Exchange Agent's
applicable account at a Book-Entry Transfer Facility as described above, the
Consent and Letter of Transmittal, and all other documents required thereby are
received by Exchange Agent within five New York Stock Exchange trading days
after the Expiration Date.
Failure to complete the guaranteed delivery procedures outlined above will
not, of itself, affect the validity of, or effect a revocation of, any Consent
properly executed by a holder of Preferred Stock who attempted to use the
guaranteed delivery procedures.
WITHDRAWAL OF TENDERS AND REVOCATION OF CONSENTS
Tenders of shares of Preferred Stock may be withdrawn at any time until the
Expiration Date and, if not otherwise accepted for exchange by the Company, at
any time after [ ], [ ], 1995. Consents may be
revoked at any time until the Expiration Date. A withdrawal of shares of
Preferred Stock tendered for exchange shall not have any effect on a Consent
with respect to such shares. However, a revocation of a Consent shall
automatically constitute a withdrawal of those shares of Preferred Stock
tendered for exchange to which such Consent relates.
Any holder of Preferred Stock who has tendered Preferred Stock or consented
to the Preferred Stock Amendment, or who succeeds to the record ownership of
Preferred Stock in respect of which such tender or consents previously had been
given, may withdraw such Preferred Stock or revoke such Consent by delivery of a
written notice of withdrawal or revocation. To be effective, a written or
facsimile transmission notice of withdrawal or revocation of Consent must (i) be
timely received by the Exchange Agent at one of its addresses specified on the
back cover of this Offering Circular before, in the case of either a withdrawal
of a tender of Preferred Stock or a revocation of a Consent, the Expiration
Date, (ii) specify the name of the registered holder of the shares of Preferred
Stock to be withdrawn or as to which Consent is to be revoked, (iii) contain the
certificate number(s) shown on the particular certificate(s) evidencing the
shares of Preferred Stock to be withdrawn or as to which Consent is to be
revoked and the number of shares of Preferred Stock to be withdrawn or as to
which Consent is to be revoked, and (iv) be signed by the registered holder of
such Preferred Stock in the same manner as the original signature on the Consent
and Letter of Transmittal (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the transfer agent for
the Preferred Stock register the transfer of such Preferred Stock into the name
of the person withdrawing Preferred Stock or revoking Consents. The
signature(s) on the notice of withdrawal or revocation of Consent must be
guaranteed by an Eligible Institution unless such shares of Preferred Stock have
been tendered (i) by a registered holder of Preferred Stock who has not
completed the boxes on the Consent and Letter of Transmittal entitled "Special
Issuance and Delivery Instructions" or (ii) for the account of an Eligible
Institution. If the shares of Preferred Stock to be withdrawn have been
delivered or otherwise identified to the Exchange Agent, a signed notice of
withdrawal or revocation of Consent is effective immediately upon receipt of
written or facsimile transmission notice of withdrawal even if physical release
is not yet effected.
Any shares of Preferred Stock which have been tendered for exchange but
which are not exchanged will be returned to the holder thereof without cost to
such holder as soon as practicable following the Expiration Date. Properly
withdrawn shares of Preferred Stock may be retendered at any time prior to the
Expiration Date by following one of the procedures described under "--How to
Tender and Consent in the Exchange Offer."
CERTAIN EFFECTS OF THE EXCHANGE OFFER ON THE MARKET FOR THE PREFERRED STOCK;
EXCHANGE ACT REGISTRATION
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The shares of Preferred Stock and Common Stock are not currently "margin
securities" under the regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). Depending on factors with respect
to listing and market quotations following consummation of the Exchange Offer,
the Common Stock may constitute margin securities for purposes of the Federal
Reserve Board and therefore could be used as collateral for loans made by
brokers. Based on the regulations of the Federal Reserve Board as in effect on
the date of this Offering Circular and the fact that shares of Preferred Stock
are not currently margin securities for purposes of the Federal Reserve Board,
the Company does not expect that the Amended Preferred Stock will be margin
securities for purposes of the Federal Reserve Board.
To the extent that shares of Preferred Stock are tendered and accepted in
the Exchange Offer, the Company believes that the trading market for shares of
Amended Preferred Stock will be more limited than the trading market of the
Preferred Stock at present. A class of capital stock with a smaller outstanding
number of shares available for trading (a smaller "float") may command a lower
price per share in the public market than would a comparable class of capital
stock with a greater float. Therefore, the market price for untendered shares of
Preferred Stock, which, upon the consummation of the Exchange Offer will become
Amended Preferred Stock, may be affected adversely to the extent that the number
of shares of Preferred Stock tendered pursuant to the Exchange Offer reduces the
float. The reduced float may also tend to make the trading price of Amended
Preferred Stock more volatile. The extent of the public market for the Amended
Preferred Stock following consummation of the Exchange Offer would depend upon
the number of holders of Amended Preferred Stock remaining at such time, the
interest in maintaining a market in the Amended Preferred Stock on the part of
securities firms and other factors.
The Preferred Stock is currently registered under the Exchange Act and
quoted on NASDAQ. Under applicable law, if the Exchange Offer is consummated,
the Company could apply to the Commission to terminate the registration of
Amended Preferred Stock under the Exchange Act if shares of Amended Preferred
Stock are neither listed on a national securities exchange nor held by more than
300 holders of record. However, the Company has no current plans to seek to
deregister the Amended Preferred Stock under the Exchange Act or to delist it
from quotation on NASDAQ. Shares of Common Stock issued for exchange in the
Exchange Offer will be registered under the Exchange Act.
Shares of Preferred Stock accepted in the Exchange Offer shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
have the status of authorized and unissued shares of preferred stock,
undesignated as to class or series, and may be redesignated and reissued as part
of any class or series of preferred stock, other than the Amended Preferred
Stock except as dividends thereon.
CONDITIONS
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange or exchange shares of Preferred
Stock tendered pursuant to the Exchange Offer, and may terminate or amend the
Exchange Offer and may postpone the acceptance for exchange of, and exchange of,
shares of Preferred Stock tendered, if (i) there shall not have been validly
tendered and not withdrawn a sufficient number of shares of Preferred Stock to
satisfy the Minimum Tender Condition, (ii) there shall not have been tendered
together with the tender of Preferred Stock in the Exchange Offer the Requisite
Consents, or (iii) any time on or after the date of this Offering Circular and
prior to the acceptance for exchange of any shares of Preferred Stock, any of
the following conditions shall occur:
(a) there shall have been instituted, pending or threatened any
action or proceeding before any court or governmental, administrative or
regulatory authority or agency, domestic or foreign, (i) challenging or
seeking to make illegal, materially delay or otherwise directly or
indirectly restrain or prohibit or make materially more costly the Exchange
Offer or the Preferred Stock Amendment, or the acceptance for exchange of,
or exchange of, any shares of Preferred Stock by the Company, or the
amendment of the terms of the Preferred Stock pursuant to the Preferred
Stock Amendment, or seeking to obtain material damages in connection with
any transaction contemplated by the Exchange Offer, including, without
limitation, the Preferred Stock Amendment; (ii) seeking to impose or
confirm limitations on the ability of any stockholder of the Company or any
affiliate of any stockholder of the Company to exercise effectively
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full rights of ownership of any shares of Common Stock; (iii) seeking to
require divestiture by any stockholder of the Company or any affiliate of
any stockholder of the Company of any shares of Common Stock or Preferred
Stock; or (iv) that otherwise is or is reasonably likely to be materially
adverse to the business, operations, properties, condition (financial or
otherwise), assets or liabilities or prospects of the Company and its
subsidiaries taken as a whole;
(b) there shall have been any action taken, or any statute, rule,
regulation, legislation, interpretation, judgment, order or injunction
enacted, entered, enforced, promulgated, amended, issued or deemed
applicable to (i) the Company or any subsidiary or affiliate of the Company
or (ii) any transaction contemplated by the Exchange Offer, by any
legislative body, court, government or governmental, administrative or
regulatory authority or agency, domestic or foreign, that is or is
reasonably likely to result, directly or indirectly, in any of the
consequences referred to in clauses (i) through (iv) of paragraph (a)
above;
(c) there shall have occurred any change, condition, event or
development that is or is reasonably likely to be materially adverse to the
business, operations, properties, condition (financial or otherwise),
assets or liabilities or prospects of the Company and its subsidiaries
taken as a whole; or
(d) there shall have occurred (i) any general suspension of, or
limitation on prices for, trading in securities on the over-the-counter
market or any national securities exchange, (ii) any decline, measured from
the date of this Offering Circular in the Standard & Poor's 500 Index by an
amount in excess of 25%, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States by New York
or federal banking authorities, (iv) any limitation (whether or not
mandatory) by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, on, or other event that, in the
judgment of the Company, might affect, the extension of credit by banks or
other lending institutions, (v) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States or any material escalation thereof,
or (vi) in the case of any of the foregoing existing on the date of this
Offering Circular a material acceleration or worsening thereof;
which, in the sole judgment of the Company in any such case, and regardless of
the circumstances giving rise to any such condition, makes it inadvisable to
proceed with such acceptance for exchange or exchange.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right; the waiver of any such right with respect to particular facts and
other circumstances shall not be deemed a waiver with respect to any other facts
and circumstances; and each such right shall be deemed an ongoing right that may
be asserted at any time and from time to time.
If any of the conditions listed above is not satisfied, the Company may (i)
refuse to accept any Preferred Stock or Consents and return all tendered
Preferred Stock and Consents to exchanging and tendering holders, (ii) extend
the Exchange Offer and retain all Preferred Stock tendered and Consents
delivered prior to the expiration of the Exchange Offer, subject to withdrawal
rights of tendering holders of Preferred Stock described herein, or (iii) waive
or amend certain of such unsatisfied conditions with respect to the Exchange
Offer and accept all properly tendered Preferred Stock or properly delivered
Consents. If such waiver or amendment constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver in a manner
reasonably calculated to inform holders of Preferred Stock of such waiver or
amendment, and the Company will extend the Exchange Offer for a period which the
Company in its discretion deems appropriate, depending on the significance of
the waiver or amendment and the manner of disclosure to holders of Preferred
Stock.
After obtaining the Requisite Consents and upon the expiration of the
Exchange Offer, the Company will file the Preferred Stock Amendment with the
Secretary of State of the State of Delaware, which will become
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effective upon the consummation of the Exchange Offer, such consummation to be
evidenced by the fact that it has accepted Preferred Stock in the Exchange
Offer.
EXCHANGE AGENT
Chemical Bank has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance may be directed to the Exchange Agent at
one of its addresses and telephone number set forth on the back cover page of
this Offering Circular.
INFORMATION AGENT
MacKenzie Partners, Inc. is serving as Information Agent in connection with
the Exchange Offer. Requests for additional copies of this Offering Circular or
a Consent and Letter of Transmittal should be directed to the Information Agent
at one of its addresses and telephone number set forth on the back cover page of
this Offering Circular.
FEES AND EXPENSES
The expenses of soliciting tenders of Preferred Stock and obtaining
Consents will be borne by the Company. The principal solicitation is being made
by mail; however, additional solicitations may be made by telegraph, telephone
or in person by officers and regular employees of the Company and its
affiliates, who will not receive additional compensation. Arrangements may also
be made with brokerage houses and other custodians, nominees and fiduciaries to
forward the material regarding the Exchange Offer to the beneficial owners of
Preferred Stock. The Company will reimburse such forwarding agents for
reasonable out-of-pocket expenses incurred by them, but no compensation will be
paid for their services.
The total cash expenditures to be incurred by the Company in connection
with the Exchange Offer including printing, accounting and legal fees and the
fees and expenses of the Exchange Agent are estimated to be approximately
$55,000.
THE PREFERRED STOCK AMENDMENT; AMENDED PREFERRED STOCK
AND AMENDED JUNIOR DEBENTURES
The following summaries of the terms of the Preferred Stock Amendment and
of the Amended Preferred Stock and Amended Junior Debentures do not purport to
be complete and are subject, and qualified in their entirety by reference, to
all of the provisions of the Preferred Stock Amendment and the Indenture, as it
will be amended by the terms of the Supplemental Indenture in accordance with
the terms hereof. The Preferred Stock Amendment is attached hereto as Annex A,
and the Preferred Stock Certificate and the Indenture (including the form of
Junior Debenture) are available in the manner set forth under "Additional
Information." See also Annex D to this Offering Circular.
PREFERRED STOCK AMENDMENT
The Preferred Stock Amendment to the Preferred Stock Certificate would:
1. Reduce the dividend rate from $1.20 per annum to $[0.40] per
annum.
2. Reduce the liquidation preference payable in the event of any
liquidation, dissolution or winding up of the Company from an
amount in cash equal to $8 for each share outstanding, plus an
amount in cash equal to all accrued but unpaid dividends thereon
to the date fixed for liquidation, dissolution or winding-up, to
an amount in cash equal to $[5] for each share outstanding, plus
an amount in cash equal to all accrued but unpaid dividends
thereon to the date fixed for liquidation, dissolution or
winding-up.
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3. Extend the period during which the Company may pay dividends in
additional shares instead of cash beyond March 1, 1996 to [March
1, 2001].
4. Amend the provisions relating to the Company's optional
redemption rights to modify the definition of Fair Value Per
Share, as described in detail below under "-- Amended Preferred
Stock -- Redemption and Exchange," to provide that, if on any
trading day within the relevant period used for the calculation
of Fair Value Per Share there shall be no last sale price regular
way of the Amended Preferred Stock, there shall be used the
highest reported bid price on NASDAQ on such day instead of, as
provided in the Preferred Stock Certificate, the average of the
highest reported bid and lowest reported asked prices on such
day.
5. Provide for the payment of dividends on annual basis instead of
quarterly.
6. Amend the Indenture to: (i) reduce the principal amount of the
Junior Debentures from $8 to $[5] and (ii) reduce the interest
rate from 15% per annum to [8]% per annum.
AMENDED PREFERRED STOCK
GENERAL. There will be 600,000 authorized shares of the Amended
Preferred Stock, of which, assuming 80% acceptance of the Exchange Offer by the
holders of Preferred Stock, [150,555] shares of Amended Preferred Stock will be
outstanding and 100,000 shares will be reserved for issuance to permit the
payment in kind of dividends thereon. The Amended Preferred Stock will rank
junior in right of payment to all indebtedness of the Company and all capital
stock ranking senior to the Amended Preferred Stock. The terms of the Amended
Preferred Stock will not restrict the incurrence of indebtedness by the Company
or the issuance by the Company of any class or series of capital stocks, whether
or not senior to the Amended Preferred Stock.
DIVIDENDS. Each share of Amended Preferred Stock will bear
cumulative dividends, at the rate of $0.40 per annum, payable annually,
commencing with the end of the first twelve-month period ending after the first
to occur after the consummation of the Exchange Offer (the "Effective Date") of
(i) the fifteenth day of the month in which the Effective Date occurs or (ii)
the first day of the month following the Effective Date, and at the end of each
three-month period thereafter. Such dividends are payable to the holders of
record at the close of business on the date (not more than 60, nor less than 10,
days prior to the respective dividend payment date) specified by the Board of
Directors at the time the dividend is declared. Any dividend payable on or
prior to [March 1, 2001] shall be payable at the option of the Company in cash
or in additional shares of Amended Preferred Stock. Dividends in additional
shares of Amended Preferred Stock are payable at the rate of [0.02] shares for
each $0.10 of such quarterly dividends not paid in cash. Fractional shares of
Preferred Stock may be issued in payment of dividends, or cash may be paid in
lieu of fractional shares. In such event, the amount of cash payable will be
determined by multiplying the market value of a share of Amended Preferred Stock
at the applicable record date by such fractional share. After [March 1, 2001],
holders of Amended Preferred Stock will be entitled to receive dividends payable
quarterly entirely in cash when and as declared by the Board of Directors. All
dividends not paid in cash or in additional shares of Amended Preferred Stock,
whether or not declared, cumulate, without interest, until declared and paid,
which declaration and payment may be for all or part of the then accumulated
dividends. Payment of cash dividends on the Amended Preferred Stock will likely
be subject to certain restricted payments provisions contained in the Company's
financing agreements.
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<PAGE>
The Amended Preferred Stock will provide that so long as any shares of
the Amended Preferred Stock are outstanding, the Company may not declare, pay or
set apart for payment any dividend on the Common Stock or any other class of
capital stock of the Company ranking junior to the Amended Preferred Stock (the
"Junior Securities") or make any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the purchase, redemption or other
retirement of any of the Junior Securities or any warrants, options or rights to
acquire any of the Junior Securities or make any distribution in respect
thereof, either directly or indirectly, and whether in cash, obligations or
shares of the Company, or other property (other than distributions or dividends
in Junior Securities to the holders of Junior Securities), and may not permit
any corporation or other entity directly or indirectly controlled by the Company
to purchase or redeem any of the Junior Securities or any warrants, options or
rights to acquire any of the Junior Securities, if there are any unpaid
dividends on the Amended Preferred Stock. Without limitation, the issuance of
additional shares of Amended Preferred Stock as a dividend on the Amended
Preferred Stock which is payable on or prior to [March 1, 2001] shall constitute
full payment of any such dividend. The foregoing restrictions shall not prevent
the payment of any dividend within sixty days after the date of declaration
thereof if at such date of declaration such payment complied with the provisions
hereof or the expenditure of up to an aggregate of $300,000 for Permitted
Employee Redemptions. "Permitted Employee Redemption" means any purchase or
redemption by the Company or any of its subsidiaries on or after the Effective
Date of Junior Securities (or warrants, options or rights to acquire any Junior
Securities) from any officer or employee (or former officer or employee) of the
Company or any of its subsidiaries.
REDEMPTION AND EXCHANGE. The Amended Preferred Stock will be redeemable
(subject to the legal availability of funds and any restrictions contained in
the Company's financing agreements), at the option of the Company, in whole or
in part at any time, at a redemption price of either $5.00 per share, together
with all accrued and unpaid dividends to the redemption date, or 110% of Fair
Value Per Share (as defined), together with all accrued but unpaid dividends to
the redemption date. The Fair Value Per Share on any date of determination is
the average of the daily closing prices per share of Amended Preferred Stock for
the 10 consecutive New York Stock Exchange trading days commencing 15 New York
Stock Exchange trading days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such sale takes place on
such day, the closing bid price regular way on such day, in either case on the
New York Stock Exchange Composite Tape, or, if the Amended Preferred Stock is
not listed or admitted to trading on such Exchange, on the principal national
securities exchange on which the Amended Preferred Stock is listed or admitted
to trading, or if the Amended Preferred Stock is not listed or admitted to
trading on any national securities exchange, the highest reported bid price on
such day as furnished by the National Association of Securities Dealers, Inc.
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information. If the Amended Preferred Stock is not reported on NASDAQ or any
such similar organization, Fair Value Per Share shall mean the fair value per
share of the Amended Preferred Stock as determined by the Board of Directors of
the Company. Optional redemptions of the Amended Preferred Stock are subject to
restricted payment provisions in the Company's financing agreements. See
"Exchange Offer -- Certain Effects of the Exchange Offer on the Market for the
Preferred Stock; Exchange Act Registration" and "The Credit Agreement."
The Amended Preferred Stock will be exchangeable (subject to the legal
availability of funds) on any dividend payment date occurring at least six
months after the Effective Date in whole or in part (in minimum increments of
$500,000), at the option of the Company, for Amended Junior Debentures in an
amount equal to the sum of the aggregate liquidation preference of all shares of
the Amended Preferred Stock being exchanged into Amended Junior Debentures. The
Company has no present intention to exercise its option to cause shares of
Amended Preferred Stock to be exchanged for Amended Junior Debentures in the
foreseeable future. The Company may not exchange any shares of Amended
Preferred Stock unless (a) no event of default exists under any of the Company's
financing agreements and (b) the exchange is allowed under the provisions of the
Company's financing agreements. If only a portion of the outstanding shares of
Amended Preferred Stock are to be exchanged for Amended Junior Debentures,
either the number of shares to be redeemed will be allocated among all holders
proportionately, or holders whose shares are to be redeemed will be selected by
lot. If the latter selection procedure were followed, some holders may have all
their shares exchanged for Amended Junior Debentures, while other holders may
not have any of their shares of Amended Preferred Stock exchanged. A partial
exchange could have adverse effects on the liquidity of the market for the
Amended Preferred Stock or Amended Junior Debentures, as well as the market
prices for such securities.
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<PAGE>
In the event such exchange would result in the issuance of an Amended
Junior Debenture in a principal amount which is less than $[5.00] or which is
not an integral multiple of $[5.00], the Company may pay to persons otherwise
entitled to fractional principal amounts of Amended Junior Debentures a payment
in cash in lieu thereof equal to the fractional principal amount each such
person would have otherwise been entitled to receive in Amended Junior
Debentures.
NO VOTING RIGHTS. The Amended Preferred Stock will have no voting rights,
except that, if at any time dividends on the Amended Preferred Stock are not
paid for six quarters, or the Company fails to meet any mandatory redemption
obligation with respect to the Amended Preferred Stock, the Company's Board of
Directors will be increased by one-third (but not less than two directors) and
the holders of Amended Preferred Stock will be entitled to elect the directors
to fill such newly created directorships. In addition, the affirmative vote of
the holders of at least a majority of the outstanding shares of Amended
Preferred Stock, voting separately as a class, will be required for the
authorization of changes, by amendment to the Company's Certificate of
Incorporation or otherwise, to the terms and provisions of the Amended Preferred
Stock so as to adversely affect the rights and preferences of the Amended
Preferred Stock.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of Amended Preferred Stock
will be entitled to receive $5.00 per share, plus any accrued and unpaid
dividends, before any distribution is made on any Junior Securities.
AMENDED JUNIOR DEBENTURES
The Amended Junior Debentures, if and when issued, will represent unsecured
subordinated general obligations of the Company and will be issued in registered
form only, without coupons, pursuant to the Indenture, as it will be amended by
a Supplemental Indenture in accordance with the terms hereof (the "Amended
Indenture"). The Supplemental Indenture will affect only three amendments to
the terms of the Indenture in order (i) to reduce the principal amount of the
Junior Debentures issuable per share of Amended Preferred Stock from $8.00 to
$[5.00], (ii) to reduce the interest rate payable thereon from 15% per annum to
[8]% per annum and (iii) to substitute the term "Amended Preferred Stock" for
the term "Preferred Stock" in the Indenture. The Company has no present
intention to issue the Amended Junior Debentures in the foreseeable future.
Prior to the issuance of the Amended Junior Debentures, the Amended Indenture
will be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The terms of the Amended Junior Debentures will include those
stated in the Amended Indenture and those made part of the Amended Indenture by
reference to the Trust Indenture Act as in effect on the date of the Amended
Indenture.
SECURITY OWNERSHIP
The Company knows of no person who, as of the date of this Offering
Circular, beneficially owned more than 5% of Common Stock outstanding, except
for Mr. Bershad and except for Lehman Electric Inc., an affiliate of Lehman
Brothers, Inc., an investment banking firm (2,318,705 shares of Common Stock),
Victor A. Morgenstern, a private investor (777,005 shares of Common Stock) and
the Vernitron Corporation 401(k) Plan (761,496 shares of Common Stock). Elliot
N. Konopko and Raymond F. Kunzmann, executive officers of the Company, are co-
trustees of the Vernitron Corporation 401(k) Plan (the "401(k) Plan"). Mr.
Bershad owns 138,462 shares of Preferred Stock. To the knowledge of the
Company, none of its executive officers has engaged in any sale or purchase
transaction with respect to Common Stock or Preferred Stock during the 40
business days immediately preceding the date of this Offering Circular, except
that the 401(k) Plan purchased 6,000 shares of Common Stock on each of August
2, and August 11, 1995 at a price of $1-1/16 per share, net of commissions.
THE CREDIT AGREEMENT
The Company has entered into a Loan and Security Agreement and related
agreements, dated June 20, 1994, as amended March 17, 1995 (the "Credit
Agreement"), with The CIT Group/Credit Finance, Inc. ("CIT"). A copy of the
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Credit Agreement is filed as an exhibit to the Schedule 13E-4 and is available
as described under "Available Information." The following summary information
is qualified in its entirety by reference to the complete text of such
documents.
GENERAL; SECURITY. The Credit Agreement provides for borrowings of up to
$17.5 million, subject to reduction in certain circumstances. The entire
available amount may be borrowed for general corporate purposes.
Borrowings under the Credit Agreement are made pursuant to a term loan
facility (the "Term Loan Facility") and a revolving credit facility (the
"Revolving Credit Facility"). As of August 31, 1995, borrowings of $2,540,540
under the Term Loan Facility and $9,872,784 under the Revolving Credit Facility
were outstanding. Amortizations of principal under the Term Loan Facility are
required in the following amounts: $128,635 during the period September 1 to
December 31, 1995, $385,905 during the period January 1 to December 31, 1996,
$385,905 during the period January 1 to December 31, 1997 and $1,640,095 during
the period January 1 to June 20, 1998. Amortizations of principal under the
Term Loan Facility are required to be made on a monthly basis. Under the
Revolving Credit Facility, amounts drawn may be repaid and reborrowed.
Borrowings under the Credit Agreement mature on June 20, 1998.
Borrowings under the Credit Agreement bear interest at a fluctuating rate
per annum equal to the rate of interest publicly announced by Chemical Bank as
its prime rate plus 2.5%. Under certain circumstances, if the Company shall
have reduced its borrowings to comply with certain reduced advance formulas, the
interest rate payable on borrowings under the Credit Agreement shall be reduced
by up to 0.5% per annum. Advances under the revolving Credit Facility are
subject to a borrowing base formula determined as percentages of values of
eligible accounts receivables, raw materials and finished goods and a one-time
advance of $825,000 against certain work-in-progress inventories, subject to
reduction.
Under the Credit Agreement, CIT has earned an annual facility fee of
$75,000 per annum, payable on each anniversary of June 20, 1994, subject to
reduction to $37,500 per annum if the Credit Agreement shall be terminated prior
to the fourth anniversary of that date. The Company is also required to pay a
minimum loan fee if the average outstanding borrowings under the Credit
Agreement for any month shall be less than $9,000,000. CIT is entitled to
receive an early termination fee of 3% of the maximum committed amount of $17.5
million if the Credit Agreement shall be terminated by the Company during the
first year following March 17, 1995, 2% if terminated by the Company during the
year thereafter and 1% if terminated thereafter. If the Company terminates the
Credit Agreement in connection with an Acquisition Financing Termination Event,
the Company shall pay a termination fee of 2% of the maximum committed amount if
such termination occurs prior to June 20, 1996, 1% if such termination occurs
within a year thereafter and 1/2% thereafter. "Acquisition Financing
Termination Event" means a termination by the Company of the then existing
financing arrangements between CIT and the Company resulting from CIT's
inability or unwillingness to provide, upon terms reasonably acceptable to the
Company, financing for the purchase by the Company of all or substantially all
of the capital stock and/or assets of another entity, including, in connection
with the financing of such purchase, the continuation, amendment or refinancing,
upon terms reasonably acceptable to the Company, of the then existing financing
arrangements between CIT and the Company. CIT is also entitled to an unused
line fee of 0.5% per annum.
Borrowings under the Credit Agreement are secured by a first and only
security interest in all of the Company's assets (other than real property) and
a first mortgage on the Company's St. Petersburg facility (the "Collateral").
RESTRICTIVE COVENANTS. Under the Credit Agreement the Company has agreed
not to, directly or indirectly: (a) sell, lease, transfer, assign, abandon or
otherwise dispose of any part of the Collateral or any material portion of its
other assets (other than sales of inventory to buyers in the ordinary course of
business); (b) consolidate with or merge with or into any other entity; (c) form
or acquire any interest in any firm, corporation or other entity; (d) lend or
advance money or property to, guarantee or assume indebtedness of, or invest (by
capital contribution or otherwise) in any person, firm, corporation or other
entity; (e) declare, pay or make any dividend, redemption or other distribution
on account of any shares of any class of stock of the Company now or hereafter
outstanding, EXCEPT THAT, prior to an Event of Default, the Company shall be
permitted to make a distribution of Preferred Stock or Amended Preferred Stock
in respect of such preferred stock; (f) make any payment of the principal amount
of or interest on any indebtedness owing to any officer, director, shareholder
or affiliate of the Company; or (g) make any loans or advances to any officer,
director, employee, shareholder or affiliate of the Company; or (h) enter into
any sale, lease or other transaction with any officer, director, employee,
shareholder or affiliate of the Company on terms that are less favorable to the
Company than those which might be obtained at the time from persons who are not
an officer, director, employee, shareholder or affiliate of the Company.
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EVENTS OF DEFAULT. All obligations under the Credit Agreement
("Obligations") are immediately due and payable, without notice or demand, and
any provisions of the Credit Agreement as to future loans and credit
accommodations by CIT shall terminate automatically, upon the termination or
non-renewal of the Credit Agreement or, at CIT's option, upon or at any time
after the occurrence or existence of any one or more of the following "Events of
Default": (a) the Company fails to pay when due any of the Obligations or fails
to perform any of the terms of the Credit Agreement or any other existing or
future financing, security or other agreement between the Company and CIT or any
affiliate of CIT; (b) any representation, warranty or statement of fact made by
the Company to CIT in the Credit Agreement or any other agreement, schedule,
confirmatory assignment or otherwise, or to any affiliate of CIT, shall prove
inaccurate or misleading in any material respect; except that, any
representation, warranty or statement of fact made by the Company to CIT which
is inaccurate or misleading by reason of fraud, any illegal act, any willful
misconduct, intentional omission or gross negligence on the part of the Company
shall constitute an Event of Default irrespective of whether such
representation, warranty or statement of fact is material or non-material; (c)
any judgment or judgments aggregating in excess of $250,000 or any injunction or
attachment is obtained against the Company which remains unstayed for a period
of ten (10) days or is enforced; (d) the Company is dissolved, or the Company
fails to maintain its corporate existence in good standing, or the usual
business of the Company or ceases or is suspended; (e) Stephen W. Bershad ceases
to be the chief executive officer of the Company or Stephen W. Bershad fails to
own 40% of the Company's issued and outstanding Common Stock; (f) the Company
becomes insolvent, makes an assignment for the benefit of creditors, makes or
sends notice of a bulk transfer or calls a general meeting of its creditors or
principal creditors; (g) any petition or application for any relief under the
bankruptcy laws of the United States now or hereafter in effect or under any
insolvency, reorganization, receivership, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect
(whether at law or in equity) is filed by or against the Company; (h) the
indictment or threatened indictment of the Company under any criminal statute,
or commencement or threatened commencement by any governmental authority or
agency or any of its designees of criminal or civil proceedings against the
Company, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of the Company;
(i) any default or event of default under any financing, security or other
agreement, document, note, mortgage or instrument at any time executed and/or
delivered to, with or in favor of CIT or any of its affiliates by any affiliate
of the Company; (j) the termination by Stephen W. Bershad of his agreement to
assist CIT in the disposition of the Collateral in the event of a liquidation
("Liquidation Assistance Agreement"), unless, effective as of the termination of
Mr. Bershad's Liquidation Assistance Agreement, CIT has an agreement, in form
and substance satisfactory to CIT, with a replacement employee acceptable to
CIT, to assist CIT in the disposition of the Collateral in the event of a
liquidation; or (k) CIT in good faith believes that either (i) the prospect of
payment or performance of the Obligations is materially impaired or (ii) the
Collateral is not sufficient to secure the Obligations.
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DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 1,400,000 shares of preferred stock, $.01 par value per
share ("Company Preferred Stock"). As of the date of this Offering Circular,
there are issued and outstanding 12,538,012 shares of Common Stock and 752,779
shares of Preferred Stock issued and outstanding. Shares of Preferred Stock
accepted in the Exchange Offer will have the status of authorized and unissued
shares of Company Preferred Stock, undesignated as to class or series, and may
be redesignated and reissued as part of any class or series of Company Preferred
Stock, except for the reissuance as Amended Preferred Stock unless as a dividend
on outstanding shares of Amended Preferred Stock. Immediately after the
consummation of the Exchange Offer, there will be 600,000 shares of Amended
Preferred Stock authorized for issuance and, assuming an 80% acceptance level of
the Exchange Offer, there will be [150,555] shares of Amended Preferred Stock
outstanding and [100,000] shares of Amended Preferred Stock reserved for
issuance.
Each share of Common Stock has one vote on all matters on which
shareholders of the Company are entitled to vote, including the election of
directors. Holders of Common Stock are entitled to participate ratably in any
distribution of assets to shareholders in liquidation after the payment in full
of all preferential amounts to which holders of any class of Preferred Stock of
the Company, such as the Preferred Stock or Amended Preferred Stock, are or may
be entitled, have no redemption or conversion rights and have no preemptive or
other subscriptive rights. The Credit Agreement prohibits the payment of
dividends on the Common Stock prior to July 20, 1998. See "Credit Agreement -
Restrictive Covenants." Holders of the Common Stock may take action without a
meeting only by the unanimous written consent of holders entitled to vote
thereon.
Chemical Bank is the registrar and transfer agent for the Common Stock and
Preferred Stock.
See "Preferred Stock Amendment; Amended Preferred Stock and Amended Junior
Debentures" for a description of the terms of the Amended Preferred Stock.
STOCK OPTION PLAN
Options to acquire up to 218,000 shares of Common Stock have been granted
to certain key employees of the Company under the Company's Long-Term Stock
Incentive Plan. The terms of the Plan are summarized in Part Three of the
Company 1994 Form 10-K attached hereto.
MARKET AND TRADING INFORMATION
The Preferred Stock is quoted and traded on NASDAQ. The following table
sets forth for the calendar periods indicated the high and low bid prices for
the Preferred Stock per share as reported in published financial sources:
HIGH LOW
---- ---
1993:
First Quarter . . . . . . . . . . $4-1/2 $2-1/2
Second Quarter. . . . . . . . . . 5 4
Third Quarter . . . . . . . . . . 4-1/2 4-1/8
Fourth Quarter. . . . . . . . . . 4-1/8 2-1/2
HIGH LOW
---- ---
1994:
First Quarter . . . . . . . . . . $3 $2-5/8
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Second Quarter. . . . . . . . . . 4-3/4 2-1/2
Third Quarter . . . . . . . . . . 4-3/8 3-5/8
Fourth Quarter. . . . . . . . . . 3/3/4 3-1/2
HIGH LOW
---- ---
1995:
First Quarter . . . . . . . . . . $4 $3-1/8
Second Quarter. . . . . . . . . . 4-1/2 3-3/4
Through [ ], 1995. 5 4-1/2
On [ ], 1995, the last day the Preferred Stock traded before
the announcement of the Transaction, the reported closing bid price on NASDAQ
for the Preferred Stock was $[ ] per share. On [ ],
1995, the last full day the Preferred Stock traded prior to the mailing of this
Offering Circular, the reported closing bid price on NASDAQ for the Preferred
Stock was $[ ] per share.
The Common Stock is quoted and traded on NASDAQ. The following table sets
forth for the calendar periods indicated the high and low bid prices for the
Common Stock per share as reported in published financial sources:
HIGH LOW
---- ---
1993:
First Quarter . . . . . . . . . . $1-3/4 $1-5/8
Second Quarter. . . . . . . . . . 1-5/8 1-5/8
Third Quarter . . . . . . . . . . 1-5/8 1-1/16
Fourth Quarter. . . . . . . . . . 1-1/16 5/8
HIGH LOW
---- ---
1994:
First Quarter . . . . . . . . . . $ 5/8 $ 5/8
Second Quarter. . . . . . . . . . 1-1/8 5/8
Third Quarter . . . . . . . . . . 1 11/16
Fourth Quarter. . . . . . . . . . 3/4 5/8
HIGH LOW
---- ---
1995:
First Quarter . . . . . . . . . . $ 7/8 $ 5/8
Second Quarter. . . . . . . . . . 1 3/4
Through September [ ], 1995. . 1-5/8 1
On [ ], 1995, the last full day the Common Stock traded before
the announcement of the Transaction, the reported closing bid price on NASDAQ
for the Common Stock was $[ ] per share. On [ ],
1995, the last full day the Common Stock traded prior to the mailing of this
Offering Circular, the reported closing bid price on NASDAQ for the Common Stock
was $[ ] per share.
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No dividends have been paid on the Common Stock.
The shares of Common Stock issuable in connection with the Exchange Offer
have been accepted for quotation on NASDAQ, subject to official notice of
issuance. THERE CAN BE NO ASSURANCE CONCERNING THE PRICES AT WHICH THE COMMON
STOCK MIGHT BE TRADED FOLLOWING THE EXCHANGE OFFER.
Quotations on NASDAQ reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT INFORMATION WITH RESPECT TO THE SALES
PRICES OF PREFERRED STOCK AND COMMON STOCK.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a summary of the material Federal income tax
considerations applicable to holders whose Preferred Stock is tendered and
accepted in the Exchange Offer and to non-tendering holders whose Preferred
Stock becomes Amended Preferred Stock if the Exchange Offer is consummated and
the Preferred Stock Amendment is effective. This summary does not discuss all
aspects of Federal income taxation that may be relevant to a particular holder
of Preferred Stock in light of his personal investment circumstances or to
certain types of holders of Preferred Stock subject to special treatment under
the Federal income tax laws (for example, life insurance companies, tax-exempt
organizations, foreign corporations and individuals who are not citizens or
residents of the United States) and does not discuss any aspect of state, local
or foreign taxation. The discussion with respect to exchanging or non-tendering
holders is limited to those who have held the Preferred Stock as "capital
assets" and who will hold the Common Stock or Amended Preferred Stock as
"capital assets" (generally, property held for investment) within the meaning of
Section 1221 of the Code. The summary is based upon laws, regulations, rulings
and decisions now in effect and upon proposed regulations, all of which are
subject to change (possibly with retroactive effect) by legislation,
administrative action or judicial decision.
THE SUMMARY IS NOT BASED UPON A LEGAL OPINION OF TAX COUNSEL. THE FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER ARE COMPLEX. THE SUMMARY IS
INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. EACH HOLDER OF PREFERRED STOCK
SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE EXCHANGE OFFER, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
EXCHANGE OF PREFERRED STOCK FOR COMMON STOCK
GENERAL. An exchange of Preferred Stock for Common Stock pursuant to the
Exchange Offer will constitute a recapitalization under Section 368(a)(1)(E) of
the Code. A holder who exchanges Preferred Stock for Common Stock will not
recognize any gain or loss on the exchange. The Common Stock received by such a
holder will have an initial tax basis equal to the adjusted tax basis of the
Preferred Stock exchanged therefor. The Common Stock will have a holding period
that includes the period during which the holder held the Preferred Stock
exchanged therefor.
TREATMENT OF NON-EXCHANGING HOLDERS. The Exchange Offer will not result in
the recognition of income, gain or loss to holders of Preferred Stock who do not
participate in the Exchange Offer. The Preferred Stock Amendment will not
result in the recognition of income, gain or loss to holders of Preferred Stock.
Upon the effectiveness of the Preferred Stock Amendment, the holders of the
Amended Preferred Stock will have an initial basis equal to the adjusted tax
basis of their Preferred Stock, and the holding period of the Amended Preferred
Stock will include the period during which the holder held the Preferred Stock.
AMENDED PREFERRED STOCK.
DISTRIBUTIONS. The amount of any distributions with respect to Amended
Preferred Stock, whether paid in additional shares of Amended Preferred Stock or
in cash, will be a dividend, taxable as ordinary income to the holder, to the
extent that the Company has current or accumulated earnings and profits for the
taxable year in
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which the dividend is paid. In the case of dividends paid in additional shares
of Amended Preferred Stock, the amount of the dividend will be the fair market
value of such stock on the date of the distribution. Accordingly, the holder may
incur tax liability with respect to such dividends without receiving a
corresponding amount of cash. The holder's adjusted tax basis in each share of
Amended Preferred Stock received as a dividend will be equal to the fair market
value of such share on the date of distribution, and the holding period for such
share will begin on the day after the date it is received.
REDEMPTIONS. The redemption of Amended Preferred Stock and the exchange of
Amended Preferred Stock for Amended Junior Debentures on any Dividend Payment
Date would each be a taxable event, the consequences of which would be
determined under the stock redemption rules of Section 302 of the Code. Under
those rules, the cash or fair market value of the Amended Junior Debentures
received by a holder would be treated as taxable dividend income to the extent
that the Company has current or accumulated earnings and profits for the taxable
year in which the redemption or exchange occurs, rather than as a "sale or
exchange", unless (i) the transaction reduces the holder's proportionate
ownership of voting stock of the Company by more than 20%, (ii) the transaction
completely terminates the holder's stock interest in the Company, or (iii) the
transaction is "not essentially equivalent to a dividend" because it effects a
"meaningful reduction" in the holder's proportionate stock interest in the
Company (collectively, the "Section 302 Tests"). In applying the Section 302
Tests, certain attribution rules apply to determine stock ownership. If any of
the Section 302 Tests is satisfied, dividend treatment would not apply and the
exchanging holder would recognize capital gain or loss equal to the difference
between (i) the sum of the cash received, if any, and the issue price of the
Amended Junior Debentures (or their fair market values if the holder is a cash
basis taxpayer) and (ii) the adjusted tax basis of the Amended Preferred Stock
surrendered in the exchange.
EXTRAORDINARY DIVIDENDS. To the extent that a redemption of Amended
Preferred Stock for cash or Amended Junior Debentures constitutes a dividend it
will be treated as an "extraordinary dividend" under Section 1059 of the Code.
As a result, Section 1059 generally will require a corporate shareholder to
reduce its basis in its remaining stock in the Company by the amount deductible
from income under Section 243 of the Code (relating to the dividends received
deduction).
REDEMPTION PREMIUM. In general, under Section 305 of the Code, holders of
preferred stock are deemed to receive a taxable dividend if the preferred stock
is callable but neither puttable by the holder nor subject to mandatory
redemption, and if the redemption price exceeds the issue price by more than a
reasonable redemption premium. Such a taxable dividend is deemed to accrue over
the period between the issue date of the preferred stock and the first call
date. It appears that the Preferred Stock Amendment will be treated for federal
income tax purposes as a constructive exchange of the Preferred Stock for the
Amended Preferred Stock. The issue price of the Amended Preferred Stock is its
fair market value immediately after it is deemed to be issued. Similarly, the
issue price of any additional shares of Amended Preferred Stock issued as a
distribution with respect to the outstanding Amended Preferred Stock should be
the fair market value of such additional shares of Amended Preferred Stock
immediately following its distribution. Thus, it is impossible to determine
whether the Amended Preferred Stock or the additional shares of Amended
Preferred Stock will be issued with a redemption premium or whether such premium
will be considered reasonable.
The Internal Revenue Service has taken the position in private letter
rulings (which cannot be relied on as precedent) that preferred stock that is
redeemable by the issuer at any time is not subject to the above-mentioned
deemed distribution rules. There can be no assurance that as yet unpublished
Treasury regulations will not find the deemed distribution rules applicable to
the Amended Preferred Stock. However, it is believed, although it is impossible
to be certain, that such Treasury regulations would only apply prospectively.
AMENDED JUNIOR DEBENTURES
GENERAL. The Service has issued proposed regulations (the "Proposed
Regulations") dealing with the determination and treatment of original issue
discount ("OID") with respect to debt instruments. Under Internal Revenue
Service Notice 90-20, the Proposed Regulations constitute "authority" for
purposes of the substantial understatement penalty provisions of Section 6662 of
the Code, and the discussion below is based upon the Proposed Regulations. The
Proposed Regulations are ambiguous in many respects, however, and do not address
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certain issues. Further, there can be no assurance that the final Treasury
regulations will not differ materially from the Proposed Regulations.
Accordingly, the ultimate federal income tax treatment of the Amended Junior
Debentures may differ from that described below.
ORIGINAL ISSUE DISCOUNT. The Company intends to take the positions, as
discussed below, that an Amended Junior Debenture and any Amended Junior
Debenture issued in payment of interest with respect thereto ("Additional
Amended Debenture") constitutes a single debt instrument for federal income tax
purposes; and that all interest payable under the Amended Junior Debentures and
Additional Amended Debentures will not constitute "qualified periodic interest"
within the meaning of the Proposed Regulations, but rather will be includible in
the "stated redemption price at maturity" of the Amended Junior Debentures.
This, in turn, would result in annual accruals of OID pursuant to the Proposed
Regulations and each holder (whether a cash or accrual method taxpayer) will be
required to include such OID in income as it accrues, determined without regard
to the fair market value of the Additional Amended Debenture received in payment
of stated interest. Holders will therefore be including the OID in income
without receiving a corresponding amount of cash. Further, under this analysis,
the payment of stated interest or the issuance of Additional Amended Debentures
to a holder of Amended Junior Debentures would not constitute a payment of
interest on such Amended Junior Debenture, but would reflect previously accrued
original issue discount, and should not give rise to additional tax.
It is possible that the Internal Revenue Service may assert that the
issuance of an Additional Amended Debenture as a payment of interest on an
Amended Junior Debenture or other Additional Amended Debenture should be treated
as a payment of interest for purposes of the OID provisions of the Code
includible in income upon issuance by a holder of such Amended Junior Debenture
or Additional Amended Debenture. In such case, the issue price of any such
Additional Amended Debenture would be determined at the time of issuance and the
amount of interest income (including OID) includible by a holder of an Amended
Junior Debenture or Additional Amended Debenture upon receipt of such Additional
Amended Debenture may be different from the amount discussed above. Moreover,
such treatment may cause Additional Amended Debentures issued on different dates
to bear different amounts of OID and not to be fungible for trading purposes,
which could adversely affect the liquidity of such Additional Amended
Debentures.
The amount of OID, if any, on a debt instrument is the difference between
its "issue price" and its "stated redemption price at maturity" subject to a
statutory de minimis exception. Under the Proposed Regulations, the portion of
OID, if any, accrued (and recognized as income) with respect to a debt
instrument will be determined for each "accrual period" (generally, the six-
month periods ending on the semiannual interest payment dates) by multiplying
the adjusted issue price at the beginning of the accrual period (I.E., the
original issue price plus previously accrued OID) by the yield to maturity of
the debt instrument (determined on the basis of compounding at the end of each
accrual period). The resulting amount is allocated ratably to each day in the
accrual period, and the amount includible in a holder's income (whether on the
cash or accrual method of accounting) with respect to the debt instrument is the
sum of the resulting daily portions of OID for each day of the taxable year in
which the holder held the debt instrument. A modified rule applies in the case
of short accrual periods. Generally, the tax basis of a debt instrument in the
hands of the holder will be increased by the amount of OID, if any, on the debt
instrument that is included in the holder's income pursuant to these rules and
will be decreased by the amount of any payment received with respect to OID
previously included in income.
As discussed above, the amount of OID, if any, on a debt instrument is the
difference between its "issue price" and its "stated redemption price at
maturity," subject to a statutory de minimis exception. The issue price of each
Amended Junior Debenture will either be (i) the trading price of the Amended
Junior Debenture on the first trading day after the exchange, if such Amended
Junior Debenture is publicly traded, (ii) the fair market value on the date of
the exchange of the Amended Preferred Stock that is exchangeable into such
Amended Junior Debenture, if such Amended Preferred Stock is publicly traded or
(iii) the stated principal amount of the Amended Junior Debenture if neither the
Amended Preferred Stock nor the Amended Junior Debentures are publicly traded,
assuming the Amended Junior Debentures have "adequate stated interest" as
defined in Section 1274 of the Code. In general, the stated redemption price at
maturity and any other amounts payable at that time other than "qualified
periodic interest" payments, defined generally as a series of payments equal to
the product of the outstanding principal times a fixed rate of interest that is
unconditionally payable, or will be treated as constructively received, at
fixed, periodic intervals of one year or less during the term of instrument.
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The Proposed Regulations do not expressly address the question of whether
interest payable in additional debt instruments, such as the Additional Amended
Debentures, constitutes qualified periodic interest payments. The Company
intends to take the position that such payments are not qualified periodic
interest payments and that, accordingly, the Amended Junior Debentures will be
issued with OID which will accrue on the Amended Junior Debentures. Moreover,
since each holder of an Amended Junior Debenture will recognize, as ordinary
income, through the accrual of OID, the full amount of interest with respect to
the Amended Junior Debenture and Additional Amended Debenture, such holder will
not also recognize ordinary income upon receipt of an Additional Amended
Debenture or a cash payment of stated interest.
If an Additional Amended Debenture is issued in lieu of a payment of cash
interest on an Amended Junior Debenture, the adjusted issue price of the Amended
Junior Debenture would be allocated between the Amended Junior Debenture and the
Additional Amended Debenture in proportion to their respective stated principal
amounts, and these allocated amounts thereafter would be used in accruing OID on
the Amended Junior Debenture and the Additional Amended Debenture. Similarly,
the tax basis of an Amended Junior Debenture and the Additional Amended
Debenture in proportion to their respective principal amounts.
In the case of an Amended Junior Debenture that is issued with OID, the
subsequent purchaser of the Amended Junior Debenture will also be required to
include OID in income, but the amount of the OID required to be reported will
vary depending upon the amount paid for the Amended Junior Debenture by the
subsequent purchaser. Section 1272 (a)(7) of the Code provides that if a
subsequent purchaser pays an "acquisition premium" (the excess of the cost of
the debt instrument over the adjusted issue price of the instrument) for an
Amended Junior Debenture, the amount of such premium will reduce the amount of
OID that such holder must include in income. A donee or other holder whose
basis in an Amended Junior Debenture is determined by reference to the basis in
the hands of the person from whom the Amended Junior Debenture is acquired is
not considered to have acquired the Amended Junior Debenture by purchase for
purposes of this rule.
MARKET DISCOUNT. If the Amended Junior Debentures are acquired at a
"market discount", some or all of any gain realized upon a sale or other
disposition, partial principal payment, or payment at maturity, of such security
may be treated as ordinary income. In general, if a holder acquires a debt
instrument at a "market discount" and thereafter recognizes gain on disposition
of the instrument (including early redemption or gift), the lessor of such gain
(or appreciation in the case of a gift) or the portion of the market discount
that accrued while the debt instrument was held by such holder will be treated
as ordinary income at the time of the disposition. A debt instrument is
acquired at a market discount (in the case of a debt instrument issued with OID)
if the purchase price is less than the sum of its revised issue price (taking
into account OID includible in the income of all previous holders of the debt
instrument, disregarding any reduction on account of acquisition premium as
defined above), less all cash payments (other than payments constituting
qualified periodic interest) received by such previous holders.
A holder who acquires a debt instrument at a market discount (and who does
not elect to include such market discount in income on a current basis as
discussed below) may be required to defer a portion of the interest expense on
any indebtedness incurred or continued to purchase or carry such debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
A holder of a debt instrument acquired at a market discount may elect to
include the market discount in income as the discount accrues, either on a
straight-line basis or, if elected as to such instrument, on a constant interest
rate basis. The current inclusion election, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies, and may not be revoked without
the consent of the Internal Revenue Service. If a holder makes a current
inclusion election, the foregoing rules with respect to the recognition of
ordinary income on a sale or certain other dispositions of such debt instrument
and the deferral of interest expense on indebtedness related thereto will not
apply.
The Amended Junior Debentures may be redeemed, in whole or in part, before
maturity. If such a redemption were considered to be a "partial principal
payment" within the meaning of Section 1276 (a)(3) of the Code, each holder of
an Amended Junior Debenture acquired at a market discount would be required to
treat such
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partial principal payment as ordinary income to the extent of any accrued market
discount on such Amended Junior Debenture.
SALE OR REDEMPTION OF AMENDED JUNIOR DEBENTURES. Subject to the market
discount rules discussed above, an Amended Junior Debenture holder generally
will recognize gain or loss on the sale, exchange, redemption, or other
disposition of an Amended Junior Debenture equal to the difference between the
amount of cash and the fair market value of property received (except to the
extent attributable to the payment of accrued interest) from such sale,
exchange, redemption or other disposition and his adjusted tax basis for such
Amended Junior Debenture. Such gain or loss generally will be capital, assuming
that such Amended Junior Debenture is held as a capital asset, and will be long-
term if the holding period is more than one year.
SALE OR EXCHANGE OF COMMON STOCK OR AMENDED PREFERRED STOCK
In general, subject to the stock redemption rules of Section 302 of the
Code, the sale, exchange or redemption of the Common Stock or Amended Preferred
Stock will result in capital gain or loss equal to the difference between the
amount realized and the holder's adjusted tax basis in the Common Stock or
Amended Preferred Stock immediately before such sale, exchange or redemption.
TAX CONSEQUENCES TO THE COMPANY
Section 382 of the Code limits the use of net operating loss carryovers by
a corporation that has been subject to an "ownership change." The taxable
income of such a corporation which is available for offset by pre-ownership
change net operating loss carryovers is limited each year to the long term tax-
exempt rate (published monthly by the Internal Revenue Service) multiplied by
the value of the equity of the corporation on the date immediately preceding an
ownership change. Similar limitations apply in respect of carryovers of other
beneficial tax attributes.
The Company believes that an ownership change will not occur as a result of
the consummation of the Exchange Offer and that it will therefore have full
utilization of its net operating loss carryovers to offset future taxable
income.
SHAREHOLDER PROPOSALS
Any holder of Common Stock who wishes to present a proposal for inclusion
in the Company's proxy statement for the next annual meeting of shareholders
must comply with the rules and regulations of the Commission then in effect.
Such proposal must be received by the Secretary of the Company at 645 Madison
Avenue, New York, New York, 10022 no later than December 16, 1995 in order to be
considered for inclusion in the Company's next annual meeting proxy statement.
ADDITIONAL INFORMATION
The Company has filed a Schedule 13E-4 Issuer Tender Offer Statement (the
"Schedule 13E-4") with the Commission with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Offering Circular
omits certain information and exhibits contained in the Schedule 13E-4. Such
additional information and exhibits can be inspected at and obtained from the
Commission in the manner set forth below. For further information with respect
to the securities offered and consents solicited hereby and the Company,
reference is made to the Schedule 13E-4 and the exhibits thereto. Statements
contained in this Offering Circular as to the terms of any contract or other
document are not necessarily complete, and, in each case, reference is made to
the copy of each such contract or other document that has been filed as an
exhibit to the Schedule 13E-4, each such statement being qualified in all
respects by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports and other information
with the Commission. Such reports and other information
40
<PAGE>
filed with the Commission, as well as the Schedule 13E-4, can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Kluczynski Federal Building, 230 South Dearborn Street, Chicago, Illinois
60604, and 75 Park Place, New York, New York 10007. Copies of such material can
also be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Copies of
the Preferred Stock Certificate and the Indenture may also be obtained from the
Company upon request to the Company at its principal executive offices.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company 1994 Form 10-K and the Company June 30, 1995 Form 10-Q attached
hereto and previously filed with the Commission by the Company pursuant to the
Exchange Act are incorporated by reference in this Offering Circular and made a
part hereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Offering
Circular of which it is a part to the extent that a statement contained herein
modifies, supersedes or replaces such statement. Any statements modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Offering Circular.
41
<PAGE>
Facsimile copies of the Consent and Letter of Transmittal will be accepted.
Consents and Letters of Transmittal, certificates for the Preferred Stock and
any other required documents should be sent by each holder or his broker, dealer
commercial bank, trust company or other nominee to the Exchange Agent at one of
the addresses as set forth below:
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHEMICAL BANK
BY MAIL:
Chemical Bank
Reorganization Department
P.O. Box 1916, GPO Station
New York, NY 10116-1916
BY FACSIMILE TRANSMISSION
(For Eligible Institutions Only)
(212) [ ]
CONFIRM FACSIMILE BY TELEPHONE:
(For Confirmation Only)
(800) [ ]
BY HAND OR OVERNIGHT COURIER:
Chemical Bank
55 Water Street-2nd Floor, Room 234
New York, NY 10041
Attn: Reorganization Department
--------------------
Any questions or requests for assistance may be directed to the Information
Agent at its address and telephone number set forth below. Requests for
additional copies of this Offering Circular, the Consent and Letter of
Transmittal of Notice of Guaranteed Delivery may be directed to the Information
Agent or the Exchange Agent. Stockholders may also contact their brokers,
dealers, commercial banks or trust companies for assistance concerning the
Exchange Offer.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
MACKENZIE
PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
Call Toll Free (800) 322-2885
<PAGE>
Exhibit A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1994 Commission File No.: 0-16182
VERNITRON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
645 MADISON AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 593-7900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
$1.20 Cumulative Exchangeable Redeemable Preferred Stock,
par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
----------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on February 28, 1995: $4,283,000
Common Stock outstanding at February 28, 1995: 12,538,012 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Vernitron Corporation (the "Company"), incorporated in New York in 1959 and
reincorporated in Delaware in 1968, is primarily engaged in the design,
manufacture, distribution and sale of electromagnetic sub-systems, specialty AC
(alternating current) and DC (direct current) motors, position and pressure
sensing components, connectors, and the distribution and service of precision
ball bearings. The Company's products are manufactured primarily for use in
high reliability applications in the aerospace, defense, communications, medical
equipment, office equipment and industrial markets.
BUSINESS OF THE COMPANY
The Company operates in three manufacturing plants and three distribution
facilities located in the United States in one business segment,
electromechanical components and sub-systems, which is organized into two
product groups: the Motion Control group and the Industrial Components group.
The Company also uses contract production capacity in Mexico.
Motion Control group sales accounted for 42% and Industrial Components
group sales made up 58% of consolidated net sales of $62.1 million in 1994 (see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for three year sales comparisons).
MOTION CONTROL GROUP. The Motion Control group designs, manufactures and
sells electromagnetic sub-systems, specialty AC and DC motors, synchros and
resolvers, optical and contact shaft encoders, potentiometers and pressure
transducers. These product lines produce all of the Company's motor and sensor
products sold either as individual components or in sub-systems.
The group's products generally involve a high degree of interactive
applications engineering to meet each customer's unique requirements for
reliability and accuracy under demanding and often hostile environmental or
shock conditions, such as space flight or industrial automation. Unit prices
generally exceed $100 and range upward to more than $1,000. In the military and
aerospace markets, contract quantities are relatively low while contract awards
may be large in dollar value. In the commercial market, contract quantities may
be significantly greater while the average sales price is generally lower.
Approximately 65% of current bookings by this group are for military (both U.S.
and foreign government) and aerospace applications. The remainder of the
business is spread over a variety of industrial automation and instrumentation
applications. A large percentage of the military/aerospace business is used in
or to support tactical missile programs, shipboard instruments and infrared
night vision systems. Markets for the group's products are generally fragmented
and competition is focused and often well entrenched.
Motors manufactured by the Company are used in applications which require
extremely reliable and precise motion control, such as computer disk drives,
laser scanners in high-speed printers and bar code readers, missile guidance
systems, industrial controls, aircraft instrumentation and controls and
robotics. Motor technology includes AC and both brush and brushless DC motors.
Synchros and resolvers are each used to measure absolute angular position.
These rugged devices have military and aerospace applications in the guidance
systems of ships, aircraft and missiles. In commercial applications, resolvers
are used to measure the absolute position and velocity of a shaft.
Optical and contact shaft encoders are devices which accurately measure
rotational motion or shaft position in a digital format and have applications in
satellites, weapon systems, radar and industrial control systems.
The Company's precision potentiometers are variable resistors, utilizing
either wire wound or conductive film technologies. These products generally
sense position and produce a feedback signal for use in high reliability
2
<PAGE>
military, aerospace and industrial applications. Other related products include
pressure transducers which, among other applications, monitor pressure in
hydraulic and HVAC applications.
INDUSTRIAL COMPONENTS GROUP. The Industrial Components group manufactures
connector products and distributes and services precision miniature ball
bearings.
The group's products are almost always sold as components, require a
minimum amount of specialized application engineering and are sold through a
network of manufacturers' representatives and distributors. Average unit
selling prices range from $1 to $3 and individual purchase orders generally
cover large unit quantities. Competition is often fragmented and focused on
niches within the markets served. Quality, customer service and competitive
cost are the critical factors in serving these markets. Substantially all of
the Industrial Components group sales are to domestic commercial and industrial
markets.
The group's connector product line focuses mainly on safety agency approved
barrier terminal blocks in the .5 amp to 50 amp range. The products are used in
a broad range of power applications, including telecommunications, power
supplies, security and fire alarms and industrial controls. The group produces
power connectors for frequent connect/disconnect applications, such as vending
machines and coin changers.
The group also distributes precision miniature ball bearings from three
warehouse locations - Montville, New Jersey, Irvine, California and Dallas,
Texas - to bearing distributors and to end users in a variety of industries,
including manufacturers of computer equipment, medical equipment and a variety
of other precision instruments.
MARKETING. The Company's products are sold directly to original equipment
manufacturers and U.S. Government agencies and contractors, and are also sold
through distributors and representatives.
DOMESTIC AND FOREIGN SALES. The following table sets forth, for each of
the last three fiscal years, information concerning the Company's domestic and
foreign net sales and operating income from continuing operations and
identifiable assets (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales:
USA . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,752 $53,668 $57,091
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . 4,380 4,981 5,821
------- ------- -------
$62,132 $58,649 $62,912
------- ------- -------
------- ------- -------
Export sales as a % of total sales: . . . . . . . . . . . . 7.0% 8.5% 9.3%
------- ------- -------
------- ------- -------
Operating income (loss):
USA . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,363 $ 1,969 $ 1,447
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . 314 183 148
Restructuring/inventory writedown charges (USA) . . . . . (1,315) (3,500)
------- ------- -------
$ 2,362 $(1,348) $ 1,595
------- ------- -------
------- ------- -------
Identifiable assets:
USA . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,197 $47,261 $52,247
------- ------- -------
------- ------- -------
</TABLE>
COMPETITION. The Company competes primarily on the basis of its ability to
design and engineer its products to meet relatively stringent shape, performance
and other requirements of its customers, most of whom are original equipment
manufacturers who purchase the component parts for inclusion in their end
products.
There are a limited number of competitors in each of the markets for the
various types of electromechanical products manufactured and sold by the
Company. Some of these competitors have substantially greater resources than
the Company. Imports of end products incorporating foreign manufactured
electromechanical components have increased in recent years resulting, in part,
in smaller available domestic markets for the Company's components.
3
<PAGE>
In addition, reductions in Government defense spending have resulted in
shrinking markets and increased competition for the remaining business.
While price is a competitive factor, the Company believes that its
applications engineering capability, which enables it to meet a customer's
special needs, is its principal competitive strength.
CUSTOMERS. There is no customer or group of affiliated customers to which
sales during the fiscal year ended December 31, 1994 were in the aggregate 10%
or more of the Company's consolidated net sales, and there is no customer, the
loss of which would have a material adverse effect on the Company's operations
taken as a whole.
In fiscal 1994, the Company had aggregate sales, both military and non-
military, of approximately $3.6 million directly to the U.S. Government,
including its agencies and departments. These sales accounted for approximately
6% of total net sales in 1994 as compared to 5% in 1993 and 7% in 1992.
Approximately 18% of net sales in 1994 were derived from subcontracts with U.S.
Government contractors as compared to 21% in 1993 and 22% in 1992. The majority
of these contracts may be subject to termination at the convenience of the
Government, and certain of them may also be subject to renegotiation.
Currently, the Company is not aware of any termination or renegotiation of such
contracts which would have a material adverse effect on its business. Because
approximately 24% of the Company's business is derived directly from contracts
with the U.S. Government or agencies or departments thereof, or indirectly
through subcontracts with U.S. Government contractors, the Company's results of
operations could be materially affected by changes in Government expenditures
for products using component parts it produces. However, the Company believes
that its exposure to such risk may be lessened by the conventional tactical
nature of the programs it participates in as well as the broad number and
diversity of its product applications and the strength of its engineering
capabilities.
BACKLOG; SEASONALITY. As of December 31, 1994 and December 31, 1993, the
Company had a backlog of orders of $23.0 million and $24.0 million,
respectively. Management believes that a substantial portion of the backlog of
orders at December 31, 1994 will be filled during fiscal 1995. Bookings and
shipments, while subject to fluctuation due to the build-to-order nature of a
substantial portion of the Company's business, are not subject to significant
seasonal variations.
PRODUCT DEVELOPMENT. The Company develops new electromechanical sub-
systems and components and improves existing products in order to keep pace with
the technological advances which generally characterize its markets. During
fiscal 1994, combined Company and customer sponsored engineering expense
associated with product development, before customer reimbursement, was $695,000
compared to $639,000 in fiscal 1993 and $535,000 in fiscal 1992. In general,
the Company recovers from customers between a quarter and a third of such
engineering expense.
RAW MATERIALS; OTHER SUPPLIERS. There is no one supplier whose delivery of
raw materials or other products is material to the operations of the Company.
While several divisions use substantial amounts of cobalt, chromium, titanium,
gold, silver and copper in certain of their products, the Company has not
experienced any serious difficulty in obtaining adequate supplies.
PATENTS, TRADEMARKS AND LICENSES. The Company's business is not dependent
on any patent or trademark.
ENVIRONMENTAL REGULATIONS. The Company does not believe that its
compliance with federal, state and local laws and regulations governing the
discharge of materials into the environment or otherwise relating to the
protection of the environment has or will have any material effect upon its
capital expenditures, earnings or competitive position. There can be no
assurance, however, (i) that changes in federal, state or local laws or
regulations, changes in regulatory policy or the discovery of unknown problems
or conditions will not in the future require substantial expenditures, or (ii)
as to the extent of the Company's liabilities, if any, for past failures, if
any, to comply with applicable environmental laws, regulations and permits.
EMPLOYEES. The Company employs approximately 600 persons, all in the
United States. Approximately 120 of such employees are subject to union
contracts, before giving effect to the disposition of the Electronic Components
business (see Note 2 to the Financial Statements). Following this disposition,
approximately 70
4
<PAGE>
employees will be covered by union contracts. The Company considers its
relations with its employees to be satisfactory. There has been no significant
interruption of operations due to labor disputes.
WORKING CAPITAL PRACTICES. The markets in which the Company competes are
not characterized by any unusual inventory or collection practices.
ITEM 2. PROPERTIES
The Company leases its executive office, located at 645 Madison Avenue, New
York, New York. The principal plants and other materially important properties
at December 31, 1994 are:
<TABLE>
<CAPTION>
OWNED OR
TYPE OF SQUARE LEASED;
LOCATION FACILITY FOOTAGE EXPIRATION
-------- -------- ------- ----------
<S> <C> <C> <C>
St. Petersburg, FL Industrial 52,500 Owned
Deer Park, NY Industrial 69,600 Owned
San Diego, CA Industrial 60,100 Leased; 2000
Montville, NJ Industrial 76,200 Leased; 1999
Gilford, NH Industrial 84,250 Owned
Irvine, CA Industrial 7,800 Leased; 1995
Dallas, TX Industrial 1,400 Leased; 1997
</TABLE>
All of the facilities owned by the Company are subject to mortgages or
security interests which secure the Company's obligations under its revolving
credit facility or industrial development bonds (see Note 4 to the Financial
Statements).
The Deer Park, NY facility is classified as held for disposal (see Notes 1
and 8 to the Financial Statements).
The Company believes that its properties are suitable and adequate for its
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits, none of which is expected
to have a material adverse affect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock has traded on the National Association of Securities
Dealers Automated Quotation Small-Cap Market ("NASDAQ") under the symbol VRNT,
since the completion of the Exchange Offer on August 13, 1991. The following
table sets forth the range of high and low market prices for the fiscal quarters
indicated as quoted on NASDAQ:
1994 1993
------------- --------------
High Low High Low
---- --- ---- ---
Fiscal Years Ended December 31:
First Quarter $ 5/8 $ 5/8 $ 1 3/4 $ 1 5/8
Second Quarter 1 1/8 5/8 1 5/8 1 5/8
Third Quarter 1 11/16 1 5/8 1 1/16
Fourth Quarter 3/4 5/8 1 1/16 5/8
The high and low market price information presented above is based on real-
time sales.
On March 1, 1995, the high and low sales price was $5/8.
On March 1, 1995, the approximate number of holders of record of the Common
Stock was 1,068.
The Company did not pay cash dividends on the Common Stock during the three
fiscal years ended December 31, 1994. The Company's policy is to retain
earnings for the foreseeable future. The Company's credit facility prohibits
the payment of cash dividends.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five fiscal years presented
below is derived from the audited Financial Statements of the Company as
adjusted to reflect the discontinuance of the Electronic Components group (see
Note 2 to the Financial Statements). The data should be read in conjunction
with the Financial Statements and the related Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $ 62,132 $ 58,649 $ 62,912 $ 67,091 $ 62,763
Income from continuing
operations before interest and
special charges . . . . . . . . . . . . . . . . . 3,606 2,081 1,555 2,036 1,182
Interest expense . . . . . . . . . . . . . . . . . 2,264 2,437 2,597 3,371 3,696
Special charges (1). . . . . . . . . . . . . . . . (1,315) (3,500) -- -- (13,650)
Income (loss) from continuing
operations. . . . . . . . . . . . . . . . . . . . 27 (3,856) (1,042) (1,335) (16,164)
Loss from continuing operations
per common share (2). . . . . . . . . . . . . . . (.04) (.82) (.23) (.39) (7.47)
Total assets (3) . . . . . . . . . . . . . . . . . 42,197 47,261 52,247 54,479 79,244
Total debt (4) . . . . . . . . . . . . . . . . . . 12,363 26,470 26,920 28,836 32,000
$3.75 Cumulative Exchangeable
Redeemable Preferred Stock (5). . . . . . . . . . -- -- -- -- 38,580
Shareholders' Equity (5) . . . . . . . . . . . . . 13,269 5,076 9,603 9,463 (9,663)
<FN>
(1) In 1994 and 1993, the Company recorded restructuring/inventory writedown
charges related to the restructuring of its Motion Control group (see Note
8 to the Financial Statements). In 1990, the Company recorded a charge as
a result of the termination of the Company's efforts to acquire Kollmorgen
and the termination of all outstanding litigation and the mutual release of
claims between the parties.
(2) The Company's earnings per share information has been restated for 1990 to
reflect an Exchange Offer completed in 1991 and a reverse stock split
effected on June 20, 1991.
(3) At December 31, 1991, the Company elected to adjust its balance sheet to
fair value in accordance with quasi-reorganization accounting principles,
resulting in, among other adjustments, a $16.2 million reduction in the
carrying value of goodwill.
(4) Includes short-term debt and current portion of long-term debt of $442,000
in 1994, $1,200,000 in 1993 $1,000,000 in 1992, $2,130,000 in 1991 and
$3,000,000 in 1990.
(5) As a result of the Exchange Offer, the Company's $3.75 Cumulative
Exchangeable Redeemable Preferred Stock was either exchanged for Common
Stock or amended (see Note 3 to the Financial Statements for a description
of the amended terms).
</TABLE>
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales by product group for continuing operations for the past three
years are presented in the table below. The Company has adopted a plan to
dispose of its Electronic Components business which, together with the
Industrial Components business, was previously reported as part of the Precision
Components product group (see Note 2 to the Financial Statements). As a result,
the net sales and results of operations of the discontinued product group have
been excluded from the table and the discussion which follow.
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Motion Control $26,052 $26,648 $32,024
Industrial Components 36,080 32,001 30,888
------- ------- -------
Net Sales $62,132 $58,649 $62,912
------- ------- -------
------- ------- -------
</TABLE>
1994 VS. 1993
Net sales increased by $3.5 million, or 6%, in 1994, compared to 1993.
The Motion Control group's sales declined by $.6 million, or 2%, in 1994,
as compared to 1993, primarily as a result of lower shipments of AC motors and
potentiometers due largely to lower U.S. and foreign government bookings and
lower bookings for certain technologically mature product applications. These
lower shipments were partially offset by higher shipments of resolvers, due to
the timing of certain large orders received in 1993, and higher electromagnetic
sub-system shipments due to new product introductions.
The Industrial Components group's sales increased in 1994 by $4.1 million,
or 13%, as compared to 1993. Sales of bearings were up by $2.9 million, or 16%,
reflecting sales to new customers and an improvement in general economic
conditions. Sales of connector products rose by $1.2 million, or 9%,
principally as a result of sales to new customers in the OEM market, higher
sales of Eurostyle connectors and an improvement in general economic conditions.
The Company's backlog at December 31, 1994 of $23.0 million was $1.0
million, or 4% lower, than 1993 year-end, while bookings of $61.2 million were
substantially the same as the prior year. The lower backlog was primarily due
to a reduction of backlog in the Motion Control group of $1.9 million resulting
from lower bookings in resolvers, primarily due to timing as several large
orders received in 1993 did not repeat in 1994, and potentiometers, primarily
due to lower U.S. Government and foreign bookings. These lower bookings were
partially offset by higher bookings of electromagnetic sub-systems due to new
product introductions. The Industrial Components group's backlog increased $1.0
million due primarily to increased bookings in the bearings product line
resulting from an improvement in general economic conditions.
Operating income, excluding restructuring/inventory writedown charges of
$1.3 million and $3.5 million in 1994 and 1993, respectively, was $3.7 million
in 1994, as compared to $2.2 million in 1993, representing a $1.5 million
increase. This increase was primarily due to the gross margin earned on the
incremental sales volume and improved profit margins in the Motion Control
product group resulting from restructuring actions taken in 1993, which were
partially offset by higher selling, general and administrative expenses. Gross
margins were 27.7% in 1994, up from 26.1% in 1993. Productivity, as measured by
the value-added per employee, increased 24.9% to approximately $65,900 in 1994,
from approximately $52,800 in 1993.
Selling, general and administrative expense, as a percentage of sales,
declined to 21.5% in 1994 from 22.1% in 1993. Selling, general and
administrative expense was up by $.4 million in 1994 as a result of increased
expenses related to the relocation of Motion Control's potentiometer and
pressure transducer product lines from the Company's Deer Park, New York
facility to St. Petersburg, Florida and the reinstatement of certain profit
sharing provisions.
8
<PAGE>
These incremental costs were partially offset by efficiencies resulting from the
aforementioned Motion Control restructuring initiated in 1993.
In 1993, the Company recorded a $3.5 million charge related to the
restructuring of the Motion Control group, of which $2.3 million was related to
the write-down of certain slow-moving and excess raw material inventory (see
discussion of 1993 vs. 1992 below). As part of this restructuring, the Company
also announced its intention to close and sell the Deer Park, New York facility.
In 1994, the Company recorded an additional $1.3 million charge related to this
restructuring, $1.0 million of which is to provide additional inventory reserves
to reflect slower turnover of the inventory than was anticipated in the 1993
charge calculation. The remaining $.3 million of the 1994 charge is to adjust
the carrying amount of the other assets held for disposal in connection with the
restructuring to reflect current market values.
Interest expense declined by $.2 million in 1994 as a result of lower
average borrowings due primarily to the repurchase of the Company's bank
indebtedness at a discount (see Note 4 to the Financial Statements). This was
partially offset by higher interest rates.
At December 31, 1994, the Company had approximately $11 million of net
operating loss carryforwards available to reduce future taxable income.
1993 VS. 1992
Net sales declined by $4.3 million, or 7%, in 1993, compared to 1992.
The Motion Control group's sales accounted for $5.4 million of this
decline, primarily due to lower U.S. and foreign military sales in 1993 and to
the completion of deliveries for certain commercial equipment and space programs
in 1992.
Industrial Components group sales increased by $1.1 million, a 4% increase,
compared to 1992. Sales of connector products rose by 7% as the result of
increased market penetration and the introduction of the Eurostyle connector.
Sales of bearings were up 1%, reflecting some pickup in general economic
activity.
The Company's total bookings increased approximately 3% in 1993 over 1992,
while backlog at December 31, 1993 was approximately 13% higher compared to
year-end 1992. Motion Control group bookings were up approximately 3% in 1993
over 1992, primarily as a result of increased bookings of military products.
Bookings for the Motion Control group's sensor products (comprised of
potentiometers, encoders, resolvers and synchros), which declined in 1992,
increased slightly in 1993 over their 1992 level. Backlog for the Motion
Control group at December 31, 1993 was up by approximately $.7 million compared
to backlog at December 31, 1992. Industrial Components group bookings increased
by approximately 4% in 1993 compared to 1992 due primarily to the introduction
of the Eurostyle connector. Backlog for the Industrial Components group
increased by approximately $1.3 million at December 31, 1993, compared to
backlog at December 31, 1992.
Operating income of $2.2 million, excluding the $3.5 million
restructuring/inventory writedown charge described below, was $.6 million above
1992. Cost reductions and productivity improvements achieved through reduced
headcount and improved operating efficiencies in the Motion Control group and
the connector product line of the Industrial Components group and lower selling,
general and administrative expense (see below) more than offset the negative
impact on operating income of the lower sales volume in the Motion Control
group. Gross margins were 26.1% in 1993, up from 25.2% in 1992. Productivity,
as measured by the value-added per employee, increased 13.5% to approximately
$52,800 in 1993 from approximately $46,500 in 1992.
Selling, general and administrative expense was $1.1 million lower in 1993
primarily as a result of staff reductions and elimination of profit sharing
provisions due to lower earnings.
During 1993, the company determined to restructure its Motion Control
group, which had operated as two separate divisions. The restructuring provided
for the consolidation of the two separate divisions under a single operating
management based in San Diego, California. The Company also determined to
increase its reserves for slow moving and excess inventories in the Motion
Control group. The Company determined to consolidate the two divisions because
it believed that the combination would allow the use of more productive, higher
quality
9
<PAGE>
manufacturing techniques in San Diego. In addition, the Company believed that
the consolidation in San Diego would substantially increase the interaction of
the Motion Control group's various engineering disciplines in response to
commercial and industrial requirements. The Company determined to increase its
reserves for slow moving and excess inventory in the Motion Control group to
reflect its determination of a permanent reduction in the demand for certain
wire wound potentiometer product lines based on the Company's belief that demand
for such products, which had declined in prior years, was not likely to return
in sufficient amounts. The reduced demand for such products contributed to the
decision to consolidate the Motion Control group in San Diego and the other
steps taken as part of the restructuring.
The Company recorded a charge of $3.5 million related to the restructuring
of its Motion Control group. The charge included $2.3 millon for the write-down
of slow moving and excess raw material and finished good inventories of wire
wound potentiometers. In addition, $1.2 million was recorded for severance,
early retirement, other employee-related benefits and other costs of the
restructuring. Of the $1.2 million accrued in 1993, approximately $250,000 and
$850,000 were charged against such accrual in 1993 and 1994, respectively. It
is expected that the balance will be charged against the accrual in 1995 (see
Note 8 to the Financial Statements).
In connection with the restructuring, major cost reduction programs were
initiated. The plan included reducing the group's workforce by more than 15%,
mostly in non-production positions, and the consolidation of engineering staff
and design facilities. The Company expects that the reduction in workforce will
result in lower labor costs and, together with other reductions in costs
resulting from the consolidation, should increase the Company's competitiveness.
Interest expense declined by $.2 million in 1993 as a result of both lower
average borrowings and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company obtained a new $15.0 million four-year, senior
secured credit facility (see Note 4 to the Financial Statements). In addition,
the Company completed a rights offering of Common Stock which provided $2.3
million of proceeds, net of expenses (see Note 3 to the Financial Statements).
The proceeds of the new credit facility, along with the net proceeds of the
rights offering, were used to repurchase the Company's then existing bank
indebtedness at a discount and to provide additional working capital.
Subsequent to December 31, 1994, the Company negotiated an amendment to its new
credit facility increasing the amount that can be borrowed under the facility to
$17.5 million, subject to availability based on the satisfaction of certain
borrowing base formulas.
During 1994, the Company received proceeds of $.6 million from the sale of
certain product lines of the discontinued Electronic Components business.
Subsequent to December 31, 1994, the Company has sold the remaining product line
of this business for $1.5 million, of which $1.0 million has been collected as
of February 24, 1995. The remaining $.5 million is scheduled to be collected in
the first half of 1995. The proceeds from these sales will be used to fund
expenses related to the decision to discontinue the Electronic Components group,
to pay down bank indebtedness and to provide additional working capital.
The Company had no material commitments for capital expenditures as of
December 31, 1994.
The Company believes that its $17.5 million credit facility, cash generated
from operations and proceeds from the sale of assets included in net assets held
for disposal, will be sufficient to meet its future capital expenditure and
working capital requirements and required debt amortization.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is included in Item 14(a) of this Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. See Item 14(b) of this Report.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The name, age and principal occupation of each director, the director's length
of service as a director of the Company, the names of the other public companies
of which the director is a director and certain other biographical information
are set forth below.
STEPHEN W. BERSHAD, 53
Chairman of the Board and Chief Executive Officer of the Company since
December 1986. Prior to joining the Company, he was a Managing Director of
Lehman Brothers and its predecessors, investment banking firms, where he held a
series of senior management positions. Mr. Bershad is a director of EMCOR
Group, Inc.
ANTHONY J. FIORELLI, JR., 65
President, Strategic Management Consulting Services, Inc., a management
consulting firm, since December 1985. Prior to that time, Mr. Fiorelli was
President and Chief Executive Officer of General Defense Corporation, a
diversified engineering and manufacturing company. Mr. Fiorelli has been a
director of the Company since February 1988.
ELIOT M. FRIED, 62
Mr. Fried has been a Managing Director of Lehman Brothers and its
predecessors, investment banking firms, since 1991. Prior to that time he was
Senior Executive Vice President of Lehman Brothers. Currently, he is Co-
Chairman of Lehman Brother's Investment Committee. Mr. Fried is a director of
American Marketing Industries, Inc., Bridgeport Machines, Inc., Energy Ventures,
Inc., Lear Seating Corporation, Sun Distributors, L.P. and Walter Industries
Inc. Mr. Fried has served as a Director of the Company since 1994.
The Board of Directors met 6 times during 1994. The Audit Committee, the
Compensation Committee and the Stock Incentive Plan Committee are the standing
committees of the Board. The Audit Committee reviews internal and external
audit procedures of the Company. Mr. Fiorelli is a member of the Audit
Committee. The Compensation Committee oversees compensation policies of the
Company. Its members are Messrs. Bershad and Fiorelli. The Stock Incentive
Plan Committee administers the Vernitron Corporation Long-Term Stock Incentive
Plan. Mr. Fiorelli is a member of the Stock Incentive Plan Committee. The
Audit Committee and the Compensation Committee met once in 1994.
Each director attended all meetings of the Board and of the Committees on
which the director served.
The compensation of directors is fixed by the Board of Directors.
Directors who are not employees of the Company receive meeting fees of $2,500
for each Board meeting attended and $1,000 for each committee meeting attended
other than in connection with a Board meeting. Directors are reimbursed for
travel and other expenses incurred in the performance of their duties.
11
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid to the Company's executive
officers for services in all capacities for the three years ended December 31,
1994:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION COMPENSATION LONG TERM
-------------------------------- ------------ ALL OTHER
BONUS OTHER ANNUAL OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) COMPENSATION (# OF SHARES)(2) ($)(3)
--------------------------- ---- -------- ------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen W. Bershad.............. 1994 262,500 150,000 - 21,000 10,810
Chairman of the Board and 1993 262,500 - - - 3,385
Chief Executive Officer 1992 262,500 150,000 - - 16,616
Edward M. Murchie (4)............. 1994 240,000 - - 121,000 8,474
President and Chief 1993 240,000 - - - 470
Operating Officer 1992 240,000 105,000 - - 11,397
Elliot N. Konopko (5)............. 1994 175,000 55,000 - 15,000 6,318
Vice President, General 1993 175,000 - - - 3,338
Counsel and Secretary 1992 175,000 40,000 - - 5,534
Raymond F. Kunzmann (6)........ 1994 120,000 28,000 - 20,000 2,721
Vice President-Finance
and Controller
_____________________
<FN>
(1) Reflects payments under the Company's bonus plan, which is described in the
"Compensation Committee Report on Executive Compensation."
(2) Reflects awards under the Company's Long-Term Stock Incentive Plan, which
is described under "Stock Incentive Plan." The exercise price of options
granted prior to 1994 (covering 42,000 shares, 242,000 shares and 30,000 shares
in the case of Messrs. Bershad, Murchie and Konopko, respectively) were adjusted
pursuant to the terms of the Incentive Plan in 1994. See "Stock Incentive
Plan."
(3) Reflects matching contributions under the Company's 401(K) Plan, and
payments under the Company's executive health insurance plan. Vernitron's
executive health insurance plan, which covers only executive officers, provides
for the reimbursement of deductible and coinsurance amounts and certain medical
expenses not covered under Vernitron's basic medical plans.
(4) Mr. Murchie's employment with the Company terminated on January 30, 1995,
at which time Mr. Bershad assumed the additional duties of President and Chief
Operating Officer. Under the terms of a severance agreement with the Company
entered into in connection with his termination of employment, the Company
agreed to pay Mr. Murchie his salary, and continue certain benefits, under
certain circumstances until April 26, 1996. Mr. Murchie's options to acquire up
to 363,000 shares of Common Stock, including options granted in 1994, terminated
unexercised following his termination of employment.
(5) Mr. Konopko has been Vice President, General Counsel and Secretary of the
Company since March 1990.
(6) Raymond F. Kunzmann was elected Vice President-Finance and Controller on
June 2, 1994. Prior to that time, he was Group Controller at Mannesmann Capital
Corporation, a diversified manufacturing company, from January 1994 until May
31, 1994, and was Controller and held other positions at Lear Siegler, Inc., a
diversified manufacturing/service company, from January 1987 until December
1993.
</TABLE>
401(K) PLAN
Vernitron currently maintains a 401(K) Salary Reduction Plan (the "401(K)
Plan") which is intended to qualify under Sections 401(a) and 401(K) of the
Internal Revenue Code. All employees who are not members of collective
12
<PAGE>
bargaining groups and who are 21 years of age or older are eligible to
participate in the 401(K) Plan on the first calendar day of the month
immediately following the month in which they complete 1,000 hours of service.
All eligible executive officers have elected to participate in the 401(K) Plan.
Eligible employees electing to participate in the 401(K) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(K) Plan. The minimum contribution is not less than 3% of
annual gross pay. The maximum is prescribed by the Tax Reform Act of 1986. The
limit for 1994 was $9,240 and will be $9,240 in 1995. Effective November 6,
1991, the Company elected to make the matching contribution in Common Stock of
the Company. The Company matched in stock each employee's 3% contribution in
1994. Eligible employees who elect to participate in the 401(K) Plan and whose
employment began prior to December 1, 1988 are 100% vested in the Company's
matching contribution when made. Eligible employees whose employment began on
and after December 1, 1988 are vested in the Company's matching contribution
according to the following schedule: less than 1 year of service - 0%; 1 year
of service - 20%; 2 years of service - 40%; 3 years of service - 60%; 4 years of
service - 80%; and 5 years of service - 100%.
STOCK INCENTIVE PLAN
The Vernitron Corporation Long-Term Stock Incentive Plan (the "Incentive
Plan") was approved by the stockholders in 1991. The Incentive Plan is
administered by the Stock Incentive Plan Committee (the "Committee"). The
Committee selects participants from among those executives and other key
employees of the Company and its subsidiaries who are in a position to
contribute materially to the success of the Company and determines the amounts,
times, forms, terms and conditions of grants.
Grants may be in the form of options to purchase shares of Common Stock,
stock appreciation rights, restricted stock and performance units (collectively,
"stock incentives"). Grants may be made for up to 450,000 shares of Common
Stock of the Company in the aggregate. Stock appreciation rights may be granted
on a "free-standing" basis or in conjunction with all or a portion of the shares
covered by an option. Stock incentive awards are subject to such provisions as
the Committee determines and may be exercised at one time or in such
installments and at such prices over the balance of the exercise period as
determined by the Committee.
Each stock incentive is exercisable in whole or in part, prior to its
cancellation or termination, by written notice to the Company. If any option is
being exercised, such notice must be accompanied by payment in full of the
purchase price in cash or, if acceptable to the Committee, shares of Company
Common Stock or partly in cash and partly in such shares. Stock incentives are
not transferable except by will or by laws of descent and distribution.
In general, each stock incentive will terminate upon the earlier of (i) the
date fixed by the Committee when the stock incentive is granted or (ii) unless
determined otherwise by the Committee, termination of employment other than for
cause, to the extent the stock incentive was then exercisable, up to 90 days
after the participant's termination of employment. In the event of death or
termination due to disability, the stock incentive may be exercised to the
extent then exercisable for up to one year thereafter. If a participant's
employment is terminated for cause, however, his or her ability to exercise any
stock incentive is terminated.
The Company may make loans to such participants as the Committee, in its
discretion, may determine in connection with the exercise of options in an
amount up to the exercise price of the option plus any applicable withholding
taxes. In no event may any such loan exceed the fair market value, at the date
of exercise, of the shares covered by the option exercised.
Under the Incentive Plan, the Committee may determine, in the event of a
change of control of the Company, that all stock incentives which have not
terminated and which are then held by any participant will become immediately
exercisable. Any such determination by the Committee may be set forth in an
applicable option agreement or by resolution of the Committee.
Options outstanding under the Incentive Plan to acquire up to 117,000
shares were granted prior to 1994, including to Stephen W. Bershad (42,000
shares) and Elliot N. Konopko (30,000 shares). Options outstanding under the
Incentive Plan to acquire up to an additional 101,000 shares were granted in
1994 to certain new and current employees, including to Stephen W. Bershad
(21,000 shares), Elliot N. Konopko (15,000 shares) and Raymond F. Kunzmann
(20,000 shares). All options are exercisable to the extent of 40% thereof
within one year from the date
13
<PAGE>
of grant and an additional 30% each year thereafter. All options are incentive
stock options. All options terminate seven years after the date of grant and
are exercisable at $0.75 per share, except that Mr. Bershad's options terminate
five years after grant and are exercisable at $0.83 per share. The exercise
price for options granted prior to 1994 was adjusted from $2.00 to $0.75 per
share ($2.20 to $0.83 per share in the case of Mr. Bershad) pursuant to the
Incentive Plan as a result of a rights offering of Common Stock by the Company
in 1994.
The following table contains information concerning the grant of stock
options to the named executive officers during 1994 under the Incentive Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1)
------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATIONS
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5% 10%
---- ----------- ------------ ------------ ----------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Stephen W. Bershad 21,000 21% 0.83 10/18/99 $6,405 $14,952
Elliot N. Konopko 15,000 15% 0.75 10/18/01 4,575 10,680
Raymond F. Kunzmann 20,000 20% 0.75 06/01/01 6,100 14,240
_____________________
<FN>
(1) The options were granted in October 1994 and have an exercise price equal
to the fair market value of the Common Stock on the date of grant. The options
vest over time and have a term of seven years, except for the options granted to
Mr. Bershad which expire five years from the date of grant, as described above.
Options to acquire up to 121,000 shares granted to Mr. Murchie in October 1994
terminated unexercised following his termination of employment in January 1995.
The exercise prices for options granted prior to 1994 to Messrs. Bershad and
Konopko (covering 42,000 shares and 30,000 shares, respectively) were adjusted
pursuant to the Incentive Plan as described above.
</TABLE>
The following table provides information with respect to the named
executive officers concerning options that have been repriced in 1994 pursuant
to the Incentive Plan. During the past ten years, the Company has not repriced
options, except in 1994, and has not granted stock appreciation rights (SARs).
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS
------------------------------
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE EXERCISE ORIGINAL
UNDERLYING OF STOCK AT PRICE AT OPTION TERM
OPTIONS/ TIME OF TIME OF REMAINING
SARS REPRICING OR REPRICING OR NEW AT DATE OF
REPRICED OR AMENDMENT AMENDMENT EXERCISE REPRICING OR
NAME (1) DATE AMENDED (#) ($) ($) PRICE ($) AMENDMENT
---- ---- ----------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen W. Bershad 8/12/94 42,000 0.75 2.20 0.83 2 years
Elliot N. Konopko 8/12/94 30,000 0.75 2.00 0.75 4 years
________________
<FN>
(1) Options to acquire up to 242,000 shares of Common Stock held by Mr. Murchie
were repriced in 1994 but expired unexercised following his termination of
employment in January 1995.
</TABLE>
14
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation.
Under the supervision of the Compensation Committee of the Board of
Directors, the Company has developed and implemented compensation policies which
seek to enhance the profitability of the Company, and thus shareowner value, by
aligning closely the financial interests of the Company's senior managers with
those of its shareowners. In furtherance of these goals, the Company relies to
a large degree on annual bonus and longer-term stock incentive compensation to
attract and retain executive officers and other key employees and to motivate
them to perform to the full extent of their abilities. Both types of incentive
compensation are not guaranteed and are variable and closely tied to corporate,
business unit and individual performance in a manner designed to encourage a
sharp and continuing focus on building profitability and shareowner value. The
annual bonus and stock incentive compensation is more closely tied to the
Corporation's success in achieving significant financial and other performance-
oriented goals. The Committee considers the total compensation (earned or
potentially available) of each of the executive officers and the other senior
managers in establishing each element of compensation. Eligible persons must be
employed by the Company at the time bonus compensation is awarded.
In evaluating the performance and setting the incentive compensation of the
Chief Executive Officer, the Committee has taken note of management's efforts in
completing a financial restructuring in 1994, restructuring the Company's
businesses to adjust for the decline in its defense business and in effectively
directing the Company's operations under the difficult economic conditions in
the Company's served markets over the last two fiscal years, as well as the
Company's results of operations during such period.
In its review of other senior management performance and compensation for
1994, the Committee has also taken into account management's consistent
commitment to the long-term success of the Company through development of new or
improved products, the implementation of significant cost reductions, resulting
in increased efficiencies and continued debt reduction.
Based on its evaluation of these factors, the Committee believes that the
senior management of the Company is dedicated to achieving significant
improvements in long-term financial performance and that the compensation
policies the Committee has implemented and administered have contributed to
achieving this management focus.
During each fiscal year, the Committee considers the desirability of
recommending to the Long-Term Stock Incentive Committee granting senior
executives, including executive officers, awards under the Incentive Plan, which
provides the flexibility to grant longer-term incentives in a variety of forms,
including performance units, stock options, stock appreciation rights and
restricted stock. In 1994 the Long Term Stock Incentive Committee, upon the
recommendation of the Committee, granted options to acquire up to 61,000 shares
of Common Stock to current employees and 40,000 shares to new employees. As
required pursuant to the Incentive Plan, the Long-Term Stock Incentive Committee
revised the exercise price of options granted pursuant to the Incentive Plan
prior to 1994 as a result of the rights offering of Common Stock completed in
July 1994 to reflect the fair market value of the Common Stock following the
rights offering. The Long-Term Incentive Committee's determination was based on
the trading prices of the Common Stock prior to and following the consummation
of the rights offering. See "Stock Incentive Plan".
Members of the Compensation Committee
Stephen W. Bershad
Anthony J. Fiorelli, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Bershad, a member of the Compensation Committee, is Chairman of the
Board and Chief Executive Officer of the Company. Mr. Fiorelli's consulting
firm was paid a fee for consulting services of approximately $50,000 in 1994.
15
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The information in the foregoing report and the following graph shall not
be incorporated by reference (by any general statement incorporating by
reference or otherwise) into any prior or future filing under the Exchange Act
or the Securities Act of 1933, except to the extent the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The following graph shows the value of a $100 investment in Common Stock
from August 30, 1991 through December 31, 1994, as of such dates, with a similar
investment in the NASDAQ Non-Financial Stock Index and the S&P High Technology
Composite Index. The NASDAQ Non-Financial Stock Index is an index comprising
all non-financial common shares traded on the NASDAQ National Market and the
NASDAQ Small-Cap Market. The S&P High Technology Composite Index is an index
comprising common shares of companies in the aerospace/defense, communications
equipment, electronics and office equipment and supplies industries. Both the
NASDAQ Non-Financial Stock Index and the S&P High Technology Composite Index are
calculated on a total return basis to include the reinvestment of dividends.
The Common Stock was first quoted on NASDAQ on August 14, 1991.
[Graph]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
8/30/91 12/27/91 6/30/92 12/31/92 6/30/93 12/31/93 6/30/94 12/30/94
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vernitron
Common Stock $100 $ 88 $ 91 $ 91 $ 91 $ 31 $ 59 $ 35
NASDAQ Non-
Financial
Index $100 $114 $104 $125 $129 $142 $124 $135
--------------------------------------------------------------------------------------------------
S&P High
Technology
Composite Index $100 $104 $ 97 $109 $122 $133 $124 $143
--------------------------------------------------------------------------------------------------
</TABLE>
(1) On July 20, 1994 the Company issued an additional 7,352,942 shares of
Common Stock to existing stockholders at $0.34 per share pursuant to a rights
offering of Common Stock. Prior to the rights offering, there were 5,185,070
shares of Common Stock outstanding. Based on the $0.75 per share average of the
closing bid and asked prices of the Common Stock quoted on NASDAQ as of December
31, 1994, the value of Common Stock purchased in the rights offering increased
by 120% from July 20, 1994 to December 31, 1994. During the same
16
<PAGE>
period, the NASDAQ Non-Financial Stock Index and S&P High Technology Composite
Index increased by 6% and 17%, respectively
AGREEMENTS WITH DIRECTORS AND OFFICERS
The Company has entered into indemnification agreements with its directors
and certain officers in order to induce them to continue to serve as directors
and officers of the Company, indemnifying them for any and all liabilities
incurred by them arising out of their service as directors or officers, other
than liabilities arising out of conduct which has been determined in a final
adjudication to constitute bad faith or a knowing violation of law or receipt by
such person of an improper personal benefit. The rights to indemnification
under such agreements are in addition to any rights to indemnification contained
in the Company's Certificate of Incorporation or By-Laws, which provide for
indemnification under certain circumstances. The Company has agreed to pay Mr.
Konopko up to six months' base compensation and certain other benefits in the
event of his termination by the Company other than for cause.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
beneficially owned by the Company's directors individually, and by all directors
and officers as a group, as of March 31, 1995:
<TABLE>
<CAPTION>
SHARES EXERCISABLE TOTAL
OWNED STOCK SHARES
DIRECTLY OR OPTION BENEFICIALLY PERCENT
INDIRECTLY (1) SHARES (2) OWNED OF CLASS
-------------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Stephen W. Bershad . . . . . . . 5,685,157 42,000 5,727,158 45.2%
Anthony J. Fiorelli, Jr. . . . . 69,245 -- 69,245 (4)
Eliot M. Fried (3) . . . . . . . -- -- -- --
Directors and Executive Officers
as a group (5 persons) . . . . . 5,754,402 72,000 5,826,402 46.2%
____________________
<FN>
(1) Does not include 761,496 shares of Common Stock owned by the Vernitron
Corporation 401(K) Plan (the "401(K) Plan") as of March 31, 1995. Elliot N.
Konopko and Raymond F. Kunzmann, who are executive officers of the Company, are
the sole trustees of the 401(K) Plan and may be deemed to beneficially own such
shares, although each of them disclaims beneficial ownership of such shares.
Mr. Bershad owns 2,731,337 shares of Common Stock directly and 2,953,820 shares
of Common Stock indirectly through SWB Holding Corporation, of which he is the
sole shareholder and Chairman.
(2) Shares covered by stock options exercisable on March 31, 1995, or within 60
days thereafter.
(3) Eliot M. Fried is a Managing Director and a Co-Chairman of the Investment
Committee of Lehman, which may be deemed to beneficially own 2,318,705 shares of
Common Stock. See "Principal Stockholders" below. Mr. Fried disclaims
beneficial ownership of such shares.
(4) Less than 1% of the total Common Stock outstanding.
</TABLE>
Mr. Bershad also directly owns, as of March 31, 1995, 128,635 shares of
$1.20 Cumulative Exchangeable Redeemable Preferred Stock, $.01 par value per
share ("Preferred Stock"), of the Company, constituting approximately 18.5% of
the outstanding shares of Preferred Stock. No other director or officer owns
any shares of Preferred Stock.
17
<PAGE>
The Company knows of no person who, as of March 31, 1995, beneficially
owned more than five percent of the Common Stock outstanding, except for Mr.
Bershad and except as set forth below.
AMOUNT AND
NAME AND ADDRESS NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
Lehman Electric Inc. 2,318,705 shares 18.5%
World Financial Center
200 Vesey Street
New York, NY 10285
Victor A. Morgenstern 777,005 shares 6.2%
2 North LaSalle Street
Chicago, IL 60602
Vernitron Corporation 401(K) 761,496 shares 6.1%
Plan
Vernitron Corporation
645 Madison Avenue
New York, NY 10022
Lehman Electric Inc., a Delaware corporation ("Lehman Electric"), is an
investment vehicle. Lehman Brothers Inc., a Delaware corporation ("Lehman
Brothers"), is a registered broker-dealer. Lehman Brothers Group Inc., a
Delaware corporation ("Group"), is a holding company and parent of Lehman
Electric. Lehman Brothers Holdings Inc., a Delaware corporation ("Holdings"),
through its domestic and foreign subsidiaries, is a full line securities firm.
It is the immediate parent of Lehman Brothers and Group. The foregoing entities
(other than Lehman Brothers) may be deemed to beneficially own the 2,318,705
shares of Common Stock directly owned by Lehman Electric. In the ordinary
course of its business on behalf of its customers, Lehman Brothers may purchase
and sell shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None, other than as set forth in Item 11 above.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) AND (2) FINANCIAL STATEMENTS
See accompanying index to financial statements and schedules.
(a)(3) EXHIBITS
See accompanying index to Exhibits.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1994, the Company filed no reports on
Form 8-K.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: VERNITRON CORPORATION
(REGISTRANT)
By /s/ STEPHEN W. BERSHAD
STEPHEN W. BERSHAD
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 28th day of March, 1994.
/s/ Stephen W. Bershad Chairman of the Board of
STEPHEN W. BERSHAD Directors and Chief Executive
Officer
/s/ Raymond F. Kunzmann Vice President - Finance, Controller
RAYMOND F. KUNZMANN and Chief Financial Officer
/s/ Anthony J. Fiorelli, Jr. Director
ANTHONY J. FIORELLI, JR.
/s/ Eliot M. Fried Director
ELIOT M. FRIED
20
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994
VERNITRON CORPORATION
<PAGE>
FORM 10-K -- ITEM 14(a)(1) AND (2) AND ITEM 14(d)
VERNITRON CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Vernitron Corporation are included in
Item 8:
Balance sheets -- December 31, 1994 and 1993. . . . . . . . . . . . . . F-4
Statements of operations -- For the years ended December 31, 1994,
1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of cash flows -- For the years ended December 31, 1994,
1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Statements of shareholders' equity -- For the years ended December 31,
1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . F-9
The following financial statement schedule of Vernitron Corporation is
included in Item 14(d):
Schedule II -- Valuation and qualifying accounts. . . . . . . . . . . .F-17
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Vernitron Corporation:
We have audited the accompanying balance sheets of Vernitron Corporation (a
Delaware corporation) as of December 31, 1994 and 1993, and the related
statements of operations, shareholders' equity and cash flows for the three
years ended December 31, 1994. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vernitron Corporation as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for the three years ended December 31, 1994 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 24, 1995
F-3
<PAGE>
BALANCE SHEETS
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
------- -------
<S> <C> <C>
A S S E T S
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . $ 27 $ 103
Accounts receivable, net of allowance
for doubtful accounts of $345 in 1994
and $278 in 1993 . . . . . . . . . . . . 9,293 8,323
Inventories, net . . . . . . . . . . . . . 14,527 18,797
Other current assets . . . . . . . . . . . 468 1,025
------- -------
TOTAL CURRENT ASSETS . . . . . . . . . 24,315 28,248
NET PROPERTY, PLANT AND EQUIPMENT. . . . . . 7,990 9,389
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of $627
in 1994 and $418 in 1993 . . . . . . . . . 6,832 7,041
NET ASSETS HELD FOR DISPOSAL . . . . . . . . 2,507 1,886
OTHER ASSETS . . . . . . . . . . . . . . . . 553 697
------- -------
TOTAL ASSETS . . . . . . . . . . . . . $42,197 $47,261
------- -------
------- -------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
BALANCE SHEETS - (CONTINUED)
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
------- -------
<S> <C> <C>
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . $ 6,394 $ 6,524
Accrued expenses and other liabilities . . 5,941 5,051
Current portion of long-term debt. . . . . 442 1,200
------- -------
TOTAL CURRENT LIABILITIES . . . . . . . 12,777 12,775
LONG-TERM DEBT, less current portion . . . . 11,921 25,270
OTHER LONG-TERM LIABILITIES. . . . . . . . . 3,579 3,357
DEFERRED INCOME. . . . . . . . . . . . . . . 651 783
SHAREHOLDERS' EQUITY:
$1.20 CUMULATIVE EXCHANGEABLE REDEEMABLE
PREFERRED STOCK, $.01 PAR VALUE: authorized
1,400,000 shares, issued and outstanding
672,344 shares in 1994 and 577,946 shares
in 1993 . . . . . . . . . . . . . . . . . . 7 6
COMMON STOCK, $.01 PAR VALUE:
authorized 20,000,000 shares, issued and
outstanding 12,538,012 in 1994 and
5,185,070 shares in 1993. . . . . . . . . . 125 52
CAPITAL IN EXCESS OF PAR . . . . . . . . . . 13,982 9,544
RETAINED DEFICIT (Reflects application of
quasi-reorganization accounting principles
as of December 31, 1991 eliminating a
deficit of $14,094). . . . . . . . . . . . (845) (4,526)
------- -------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . 13,269 5,076
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $42,197 $47,261
------- -------
------- -------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
STATEMENTS OF OPERATIONS
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
NET SALES $ 62,132 $ 58,649 $ 62,912
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,903 43,338 47,081
Selling, general and
administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,343 12,950 14,027
Restructuring/inventory writedown charges. . . . . . . . . . . . . . . . . . . . 1,315 3,500
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . . 209 209 209
----------- ----------- ------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,362 (1,348) 1,595
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,264 2,437 2,597
Other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 71 13
----------- ----------- ------------
Income (loss) from continuing operations before taxes and extraordinary gain . . 44 (3,856) (1,015)
Charge in lieu of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 27
----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY GAIN . . . . . . . 27 (3,856) (1,042)
Discontinued Operations:
Income (loss) from operations, net of tax benefit of $92 in 1994 . . . . . . . (143) (670) 1,144
Loss on disposal, net of tax benefit of $1,317 in 1994 . . . . . . . . . . . . (2,059)
----------- ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . (2,175) (4,526) 102
Extraordinary gain on debt repurchase,
net of charge in lieu of taxes of $3,744 in 1994 . . . . . . . . . . . . . . . 5,856
----------- ----------- ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,681 (4,526) 102
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 375 158
----------- ----------- ------------
Net income (loss) applied to common shareholders'equity. . . . . . . . . . . . . $ 3,326 $ (4,901) $ (56)
----------- ----------- ------------
----------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.04) $ (.82) $ (0.23)
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.26) (.13) 0.22
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.69
----------- ----------- ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ (.95) $ (0.01)
----------- ----------- ------------
----------- ----------- ------------
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . 8,509,003 5,185,070 5,182,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
STATEMENTS OF CASH FLOWS
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,681 $ (4,526) $ 102
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Extraordinary gain on debt repurchase, net. . . . . . . . . . . . . . . . . . (5,856)
Loss on disposal of discontinued operations, net. . . . . . . . . . . . . . . 2,059
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 1,742 1,732 1,588
(Increase) decrease in accounts receivable. . . . . . . . . . . . . . . . . . (970) 934 1,268
Decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 682 2,019 507
Decrease in other current assets. . . . . . . . . . . . . . . . . . . . . . . 498 449 72
Increase (decrease) in accounts payable and accrued expenses. . . . . . . . . 365 10 (469)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (810) 200 37
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . 1,391 818 3,105
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (797) (381) (1,122)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . 605
------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . (192) (381) (1,122)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,665 3,900 8,800
Repayment of borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . (49,272) (4,350) (10,716)
Net proceeds from common stock rights offering . . . . . . . . . . . . . . . . 2,332
Other, net.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
------- ------- --------
NET CASH USED IN FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . (1,275) (450) (1,896)
------- ------- --------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . (76) (13) 87
Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 116 29
------- ------- --------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27 $ 103 $ 116
------- ------- --------
------- ------- --------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED
------------------ ------------------- IN EXCESS EARNINGS
SHARES AMOUNT SHARES AMOUNT OF PAR (DEFICIT)
------ ------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 . . . . . . 415,593 $ 4 5,170,671 $ 52 $ 9,407 $ --
Net Income . . . . . . . . . . . . . . 102
Amount realized from utilization
of pre quasi-reorganization
tax benefits. . . . . . . . . . . . . 18
Dividends (b). . . . . . . . . . . . . 70,770 1 157 (158)
Contribution to 401(k) plan. . . . . . 14,399 27
Transfer to Capital in Excess
of Par (a). . . . . . . . . . . . . . (56) 56
Other. . . . . . . . . . . . . . . . . 9,533 (7)
------- --- ---------- ---- ------- -------
Balance at December 31, 1992 . . . . . . 495,896 5 5,185,070 52 9,546 --
------- --- ---------- ---- ------- -------
Net Loss . . . . . . . . . . . . . . . (4,526)
Dividends (b). . . . . . . . . . . . . 82,050 1 374 (375)
Transfer to Capital in Excess
of Par (a). . . . . . . . . . . . . . (375) 375
Other. . . . . . . . . . . . . . . . . (1)
------- --- ---------- ---- ------- -------
Balance at December 31, 1993 . . . . . . 577,946 6 5,185,070 52 9,544 (4,526)
------- --- ---------- ---- ------- -------
Net Income . . . . . . . . . . . . . . 3,681
Dividends (b). . . . . . . . . . . . . 94,398 1 354 (355)
Transfer to Capital in Excess
of Par (a). . . . . . . . . . . . . . (355) 355
Common Stock rights
offering . . . . . . . . . . . . . . 7,352,942 73 2,259
Amount realized from utilization
of pre quasi-reorganization
tax benefits . . . . . . . . . . . . 2,182
Other. . . . . . . . . . . . . . . . . (2)
------- --- ---------- ---- ------- -------
Balance at December 31, 1994 . . . . . . 672,344 $ 7 12,538,012 $125 $13,982 $ (845)
------- --- ---------- ---- ------- -------
------- --- ---------- ---- ------- -------
<FN>
(a) Represents transfer of the excess of Preferred Stock dividends over
available Retained Earnings.
(b) Represents a 15% dividend paid in additional shares and valued at the
average of the closing bid and ask price as of the dividend record date.
The per share amounts of these dividends were $.34, $.70 and $.57 per share
of Preferred Stock in 1992, 1993 and 1994, respectively.
</TABLE>
See notes to financial statements.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories are priced at the lower of cost (principally first-in, first-
out, or specific identification) or market.
Deferred financing costs are amortized ratably over the life of the
corresponding debt or commitment.
The excess of cost over net assets acquired is being amortized over thirty-
five years using the straight-line method.
Depreciation and amortization are provided primarily by the straight-line
method over the estimated useful lives of property, plant and equipment, which
are stated at cost, except as otherwise indicated in Note 2.
Other assets held for disposal are stated at the lower of cost or estimated
net realizable value (see Note 8).
Inter-division items and transactions have been eliminated in
consolidation.
Certain items in the 1993 and 1992 financial statements have been
reclassified to conform to the 1994 presentation.
Per share data is based upon the weighted average of common shares
outstanding during each period. Outstanding common stock options or warrants
have not been included in the 1994, 1993 or 1992 computation of per share data
as they were deemed to have been anti-dilutive.
NOTE 2 - DISCONTINUED OPERATIONS
Effective September 30, 1994, the Company adopted a plan to dispose of all
of its Electronic Components business which was comprised of the trimmer,
transformer and microwave component product lines. The disposal is being
accounted for as a discontinued operation and, accordingly, the related net
assets and operating results have been reported separately from continuing
operations. The Company's prior year's Statements of Operations have been
restated to reflect continuing operations. The loss on disposal of the
Electronic Components business for the year ended December 31, 1994 is comprised
of the estimated loss on disposal of the net assets of the business and a
provision for anticipated operating losses until disposal.
During 1994, the Company sold a portion of the assets of its Electronic
Components business for gross proceeds of $605. Subsequent to December 31,
1994, the Company has sold the remaining discontinued business' assets for
$1,500, of which $1,000 has been collected as of February 24, 1995. The
remaining $500 is scheduled to be collected in the first half of 1995.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 2 - DISCONTINUED OPERATIONS (CONT'D)
Net assets held for disposal as of December 31, 1994 consisted of the
following:
<TABLE>
<S> <C>
Inventory $1,992
Machinery and equipment 365
Other current assets 59
Current liabilities (478)
Reserve for anticipated operating losses
until disposal (75)
Reserve for estimated loss on disposal
of net assets (990)
------
Net assets of discontinued operations 873
Other assets held for disposal 1,634
------
Net assets held for disposal $2,507
------
------
</TABLE>
Revenues applicable to the discontinued business for the years ended
December 31, 1994, 1993 and 1992 were $6,897, $9,095, and $11,355, respectively.
The loss from operations of the discontinued Electronic Components business from
September 30, 1994 to December 31, 1994, which is included in the loss on
disposal, was $326, net of a tax benefit of $209.
NOTE 3 - SHAREHOLDERS' EQUITY
COMMON STOCK -
On July 20, 1994, the Company completed a rights offering of Common Stock
in which 7,352,942 shares were issued for gross proceeds of $2,500 ($2,332, net
of expenses). As a result of the completion of the rights offering, the total
number of outstanding shares of Common Stock as of December 31, 1994 is
12,538,012.
PREFERRED STOCK -
The certificate of designation (as amended in 1991) setting forth the
amended terms of the Company's $1.20 (formerly $3.75) Cumulative Exchangeable
Redeemable Preferred Stock provides for, among other things, (1) a liquidation
preference of $8 per share, (2) an annual dividend of $1.20 per share, and (3)
the ability to pay dividends thereon in additional shares instead of cash up to
March 1, 1996. The Company's Senior Credit Facility, however, prohibits the
payment of cash dividends (see Note 4). The Company at its option may redeem
the Preferred Stock at a price of $8.00 per share or an amount per share equal
to the product of 1.1 and the average of the NASDAQ daily closing prices per
share (defined in general to be the average of the highest reported bid and the
lowest reported asked prices) for ten consecutive trading days, as defined,
together with all accrued and unpaid dividends to the redemption date.
Since August, 1991, the Company has paid quarterly dividends on the
Preferred Stock in additional shares at an annual rate of 15% based on the
shares outstanding.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Credit Facility . . . . . . . . . . $10,493 $24,600
Industrial Revenue Bond . . . . . . 1,870 1,870
------- -------
12,363 26,470
Less current portion. . . . . . . . 442 1,200
------- -------
$11,921 $25,270
------- -------
------- -------
</TABLE>
On July 20, 1994, the Company obtained a new $15,000 four-year, senior
secured credit facility (the "Senior Credit Facility"). The proceeds of the
Senior Credit Facility along with the net proceeds of the rights offering (see
Note 3) were used to repurchase the Company's bank indebtedness at a discount
and to provide additional working capital. As a result of the repurchase of
indebtedness, an extraordinary gain of $5,856, net of a charge in lieu of taxes
of $3,744, was recorded.
Subsequent to December 31, 1994, the Company negotiated an amendment to the
Senior Credit Facility increasing the amount that can be borrowed under the
facility to $17,500, subject to availability based on the satisfaction of
certain borrowing base formulas. Had this amendment been effective as of
December 31, 1994, $15,800 of the $17,500 credit facility would have been
available to the Company.
Borrowings under the Senior Credit Facility bear interest at a fluctuating
rate per annum equal to the rate of interest publicly announced by Chemical Bank
as its prime rate plus 2.5% (the prime rate was 8.5% at December 31, 1994). A
commitment fee of .5% is payable on any unused amount of the Senior Credit
Facility. The Senior Credit Facility contains certain restrictive covenants
which, among other things, impose limitations with respect to the incurrence of
additional liens, mergers, consolidations and specified sale of assets. In
addition, the Senior Credit Facility prohibits the payment of cash dividends.
Borrowings under the Senior Credit Facility are secured by substantially all of
the assets of the Company.
The Company had outstanding at December 31, 1993, industrial development
revenue bonds (the "Bonds") in the amount of $1,870 secured by its Gilford, NH
manufacturing facility which has a net carrying amount of approximately $2,400.
The bonds are payable in 2005. During 1994, the bonds were remarketed and, as a
result, a letter of credit securing repayment was released and the interest rate
was converted from a floating rate to a fixed rate of 13% per annum.
Scheduled debt maturities during the next five years, which are comprised
solely of payment under the Company's Senior Credit Facility (as amended) are
$442 (1995), $589 (1996), $589 (1997) and $8,873 (1998).
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 5 - BALANCE SHEET INFORMATION
The details of certain balance sheet accounts are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
INVENTORIES:
Raw materials . . . . . . . . . . . . . $ 2,551 $ 5,820
Work-in-process . . . . . . . . . . . . 5,879 5,225
Finished goods. . . . . . . . . . . . . 6,097 7,752
-------- -------
$14,527 $18,797
-------- -------
-------- -------
NET PROPERTY, PLANT AND EQUIPMENT:
Land. . . . . . . . . . . . . . . . . . $ 600 $ 600
Buildings and improvements. . . . . . . 3,562 3,506
Machinery and equipment . . . . . . . . 7,490 7,942
------- -------
11,652 12,048
Less accumulated depreciation
and amortization . . . . . . . . . . . 3,662 2,659
------- -------
$ 7,990 $ 9,389
------- -------
------- -------
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation and related benefits . . . $ 2,180 $ 1,813
Motion Control relocation . . . . . . . 81 953
Legal . . . . . . . . . . . . . . . . . 443 236
Other . . . . . . . . . . . . . . . . . 3,237 2,049
------- -------
$ 5,941 $ 5,051
------- -------
------- -------
</TABLE>
NOTE 6 - INCOME TAXES
At December 31, 1994, the Company has net operating loss carryforwards of
approximately $11,250 which expire in the years 2005 through 2008 and
alternative minimum tax credit carryforwards of approximately $320. In
addition, the Company has approximately $8,200 of previously unrecognized tax
benefits, principally related to inventories. As the portion of the loss
carryforwards and deferred tax benefits originating prior to the 1991 quasi-
reorganization are realized, the corresponding tax effect will be credited to
Capital in Excess of Par under quasi-reorganization accounting principles rather
than reducing the Provision for Taxes. In 1994, $2,182 was credited to Capital
in Excess of Par representing the utilization of such pre quasi-reorganization
tax benefits to offset current year tax expense related to both continuing and
discontinued operations as well as the extraordinary gain. As of December 31,
1994, $5,008 of the pre quasi-reorganization tax effected benefits remain
unutilized. The utilization and realization of the carryforwards and future tax
benefits will substantially reduce or eliminate the amount of cash taxes payable
on taxable income in the future.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 6 - INCOME TAXES (CONT'D)
The Company utilizes the liability method (SFAS No. 109) in accounting for
income taxes. Income (loss) from continuing operations before taxes is from
domestic sources only for the three years ended December 31, 1994.
The provision for taxes on income from continuing operations consists of:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Current taxes:
U.S. Federal
- charge in lieu of taxes . . . . . . . $ 14 $ -- $ 18
State and local. . . . . . . . . . . . . 3 9
---- ----- -----
17 -- 27
---- ----- -----
Deferred taxes:
U.S. Federal . . . . . . . . . . . . . .
---- ----- -----
$ -- $ -- $ 27
---- ----- -----
---- ----- -----
</TABLE>
The reasons for the difference between the provision for taxes and the
amount computed by applying the statutory federal income tax rate to income
(loss) before taxes are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate. . . . . . . . . . 34% 34% 34%
Computed expected tax provision (benefit). . . $ 15 $(1,539) $ 44
Increase (decrease) in taxes
resulting from:
State and local taxes, net of federal
tax benefit. . . . . . . . . . . . . . . . 2 6
Recognition of previously unrecognized
deferred tax assets. . . . . . . . . . . . (71) (94)
Amortization of goodwill. . . . . . . . . . 71 71 71
Portion of loss not currently realizable . . . 1,468
---- ------- -----
Actual tax provision . . . . . . . . . . . . . $ 17 $ -- $ 27
---- ------- -----
---- ------- -----
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------- -------
<S> <C> <C>
Tax net operating loss carryfowards . . . . $ 4,130 $ 5,100
Inventory valuation differences . . . . . . 1,736 3,050
Other, net. . . . . . . . . . . . . . . . . 1,057 486
------- -------
Sub-Total . . . . . . . . . . . . . . . . 6,923 8,636
Valuation allowance . . . . . . . . . . . . (6,923) (8,636)
------- -------
Total deferred taxes. . . . . . . . . . . . $ -- $ --
------- -------
------- -------
</TABLE>
Total federal, foreign and state and local income taxes paid (refunded),
net of refunds, in 1994, 1993 and 1992 were $(9), $(8) and $57, respectively.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 7 - PENSION ARRANGEMENTS
The Company terminated its noncontributory defined benefit plan covering
substantially all employees not subject to a collective bargaining agreement in
1992. Included in the determination of 1992 pension expense is a curtailment
loss of $16 relating to this plan. The Company has two other plans for which
benefits and participation have been frozen. Pension benefits under these plans
are generally based upon years of service and compensation.
The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional amounts as the
Company may determine to be appropriate from time to time.
Multi-employer plans covering certain union members generally provided
benefits of stated amounts for each year of service. During 1994, in connection
with the restructuring of the Motion Control group (see Note 8), the employment
of the union members participating in these multi-employer plans ended and, as a
result, contributions to these plans ceased. As of December 31, 1994, there
were no unpaid contributions to multi-employer plans.
A summary of components of net periodic pension cost for the defined
benefit plans and the total contribution charged to pension expense for the
multi-employer plans follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned
during the period. . . . . . . . . . . . . $ -- $ -- $ 14
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . . 73 105 163
Actual return on plan assets. . . . . . . . 1 5 (30)
Net amortization and deferral . . . . . . . (5) (10) (16)
---- ---- ----
Net pension cost of defined benefit
plans. . . . . . . . . . . . . . . . . . . 69 100 131
Multi-employer plans. . . . . . . . . . . . 59 301 427
Curtailment loss. . . . . . . . . . . . . . 16
---- ---- ----
Total pension expense . . . . . . . . . . . $128 $401 $574
---- ---- ----
---- ---- ----
</TABLE>
Assumptions used in accounting for the defined benefit plans as of the
plans' measurement dates were:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Weighted-average discount rate. . . . . . . 7.5% 7.5% 7.3%
Expected long-term rate of return
on assets . . . . . . . . . . . . . . . . 6.0% 7.3% 7.0%
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 7 - PENSION ARRANGEMENTS, (CONT'D)
The following table sets forth the funded status and amount recognized in
the consolidated balance sheets for the Company's defined benefit pension plans.
Computations for certain plans were made using a September 30 measurement date.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation. . . . . . . . . $1,026 $1,003 $1,866
------ ------ ------
------ ------ ------
Accumulated benefit obligation . . . . . . $1,026 $1,003 $1,866
------ ------ ------
------ ------ ------
Projected benefit obligation . . . . . . . $1,026 $1,003 $1,866
Less plan assets at fair market value. . . 32 35 642
------ ------ ------
Projected benefit obligation in excess of
plan assets . . . . . . . . . . . . . . . 994 968 1,224
Unrecognized net gain. . . . . . . . . . . 83 80 111
------ ------ ------
Net pension liability recognized in the
balance sheet . . . . . . . . . . . . . . $1,077 $1,048 $1,335
------ ------ ------
------ ------ ------
</TABLE>
Unrecognized net gains and losses are amortized over the average future
service lives of participants. Plan assets are primarily invested in fixed
income instruments.
Under the Company's 401(k) plan, eligible employees may elect to contribute
a percentage of their earnings which the Company has matched up to 3% of gross
earnings based on the level of consolidated income. Company matching
contributions were $363 in 1994 and $423 in 1992. The Company made no matching
contribution in 1993.
NOTE 8 - OTHER INFORMATION
RESTRUCTURING PLAN -
During 1993, the Company announced its plan to restructure its Motion
Control group. The motion control business had been organized as two separate
divisions. The plan consolidated the two divisions under a single operating
management based in San Diego.
In connection with the restructuring, the Company recorded a charge of
$3,500. The charge included $2,300 for the write-down of slow moving and excess
inventory to net realizable value. In addition, $1,200 was recorded for
severance, early retirement, other employee-related benefits and other related
charges. As part of the restructuring, the Company has closed and is in the
process of selling the Deer Park, New York facility.
During 1994, the Company recorded an additional $1,315 charge related to
this restructuring, $1,015 of which is to provide additional inventory reserves
to reflect slower turnover of the inventory than was anticipated in the 1993
charge calculation. The remaining $300 of the 1994 charge is to adjust the
carrying amount of other assets held for disposal in connection with the
restructuring to reflect current market values.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
VERNITRON CORPORATION
NOTE 8 - OTHER INFORMATION, (CONT'D)
STOCK OPTIONS -
Options to purchase up to 218,000 shares of Vernitron common stock, with
exercise prices of $.75 - $.83 per share, have been issued to certain key
employees of the Company. Of that amount, 102,000 options are vested, with the
balance becoming vested as follows: 47,900 (1995), 37,800 (1996) and 30,300
(1997). These options are exercisable for up to seven years from the date of
grant. There are 532,000 shares available for future grant.
INTEREST PAID - in 1994, 1993 and 1992 was $1,883, $2,168 and $2,346,
respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Future minimum payments, under noncancellable operating leases (exclusive
of property expenses and net of sublease rental income), as of December 31,
1994, are as follows:
1995 . . . . . . . . . . . . . $ 1,581
1996 . . . . . . . . . . . . . 1,542
1997 . . . . . . . . . . . . . 1,489
1998 . . . . . . . . . . . . 1,257
1999 . . . . . . . . . . . . . 1,176
2000 and thereafter. . . . . . 409
-------
$ 7,454
-------
-------
Rent expense under such leases, net of sublease rental income, amounted to
$1,379 in 1994, $1,348 in 1993 and $1,308 in 1992.
In February 1990, the Company sold and leased back its San Diego,
California facility under an operating lease. The Company has a deferred gain
as of December 31, 1994 on this transaction of $651, which is being amortized to
income over the ten year lease term as a reduction of annual rent expense.
The Company is a defendant in various lawsuits, none of which is expected
to have a material adverse effect on the Company's financial position or results
of operations.
F-16
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
VERNITRON CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
--------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Classification of Period Expenses Accounts Deductions End of Period
-------------- ---------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1994: $278 $124 $ 57(a) $345
Year ended December 31, 1993: $291 $ 40 $ 53(a) $278
Year ended December 31, 1992: $466 $ 51 $226(a) $291
--------------------
<FN>
(a) Uncollectible accounts written off, net of recoveries.
</TABLE>
F-17
<PAGE>
Exhibit B
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1995
COMMISSION FILE NUMBER 0-16182
---------
VERNITRON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
645 MADISON AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 593-7900
---------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
YES X NO
---- ----
12,538,012 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING AS OF JULY
28, 1995.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
VERNITRON CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited):
Condensed Statements of Operations -
Quarter Ended March 31, 1995 and 1994 3
Condensed Statements of Operations -
Six Months Ended June 30, 1995 and 1994 4
Condensed Balance Sheets -
June 30, 1995 and December 31, 1994 5
Condensed Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VERNITRON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
June 30,
-----------------------------
<S> <C> <C>
1995 1994
----- -----
NET SALES $ 16,854 $ 15,836
Cost of sales 12,210 11,368
Selling, general and administrative expenses 3,497 3,294
Amortization of intangible assets 52 52
----------- ---------
OPERATING INCOME 1,095 1,122
Interest expense - net 541 653
Other expense 7 3
----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES 547 466
Charge in lieu of taxes 214 161
----------- ----------
INCOME FROM CONTINUING OPERATIONS 333 305
Discontinued Operations (Note 2):
Income from operations, includes a tax
benefit of $77 in 1994 - 118
----------- ----------
NET INCOME 333 423
Preferred stock dividends 137 81
----------- ----------
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS' EQUITY $ 196 $ 342
----------- -----------
----------- -----------
NET INCOME PER COMMON SHARE:
Continuing operations $ .02 $ .04
Discontinued operations - .03
----------- -----------
Total $ .02 $ .07
----------- -----------
----------- -----------
Weighted average common shares outstanding 12,538,012 5,185,070
----------- -----------
----------- -----------
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
VERNITRON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
<S> <C> <C>
1995 1994
----- -----
NET SALES $ 33,750 $ 30,765
Cost of sales 24,424 22,540
Selling, general and administrative expenses 7,125 6,452
Amortization of intangible assets 104 104
----------- ----------
OPERATING INCOME 2,097 1,669
Interest expense - net 1,037 1,254
Other expense 15 3
----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES 1,045 412
Charge in lieu of taxes 408 161
----------- ----------
INCOME FROM CONTINUING OPERATIONS 637 251
Discontinued Operations (Note 2):
Loss from operations, net of tax benefit of
$77 in 1994 - (118)
----------- -----------
NET INCOME 637 133
Preferred stock dividends 258 150
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS' EQUITY $ 379 $ (17)
----------- -----------
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .03 $ .02
Discontinued operations - (.02)
----------- -----------
Total $ .03 $ -
----------- -----------
----------- -----------
Weighted average common shares outstanding 12,538,012 5,185,070
----------- -----------
----------- -----------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
VERNITRON CORPORATION
CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 84 $ 27
Accounts receivable - net 9,489 9,293
Inventories - net 15,768 14,527
Other current assets 616 468
-------- --------
TOTAL CURRENT ASSETS 25,957 24,315
PROPERTY, PLANT AND EQUIPMENT - net 7,751 7,990
EXCESS OF COST OVER NET ASSETS ACQUIRED - net 6,728 6,832
NET ASSETS HELD FOR DISPOSAL 1,204 2,507
OTHER ASSETS 462 553
-------- -------
TOTAL ASSETS $42,102 $42,197
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,282 $ 6,394
Accrued expenses and other liabilities 5,617 5,941
Current portion of long-term debt 592 442
------- -------
TOTAL CURRENT LIABILITIES 11,491 12,777
LONG-TERM DEBT, less current portion 12,727 11,921
OTHER LONG-TERM LIABILITIES 3,017 3,579
DEFERRED INCOME 585 651
SHAREHOLDERS' EQUITY:
Preferred Stock, issued and outstanding 724,936
shares in 1995 and 672,344 shares in 1994 7 7
Common Stock, issued and outstanding 12,538,012
shares in 1995 and 1994 125 125
Capital in Excess of Par 14,358 13,982
Accumulated Deficit (since December 31, 1991) (208) (845)
------- -------
TOTAL SHAREHOLDERS' EQUITY 14,282 13,269
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $42,102 $42,197
------- -------
------- -------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
VERNITRON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1995 1994
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 637 $ 133
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Recognition of net operating loss carryforward 376 80
Depreciation and amortization 780 855
Increase in current assets, other than cash (1,585) (1,067)
Increase (decrease) in current liabilities (1,436) 404
Other - net (729) 377
--------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,957) 782
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (437) (241)
Proceeds from sale of assets (Note 2) 1,495
--------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 1,058 (241)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 18,712 336
Repayment of borrowings (17,756) (600)
--------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 956 (264)
--------- -------
NET INCREASE IN CASH 57 277
Cash at beginning of period 27 103
--------- -------
CASH AT END OF PERIOD $ 84 $ 380
--------- -------
--------- -------
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
VERNITRON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals) have
been included. Operating results for the quarter and six months ended June 30,
1995 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1995. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
Certain reclassifications have been made to previously reported financial
statements to conform to current classifications.
In accordance with quasi-reorganization accounting principles, the Company
elected to adjust its December 31, 1991 balance sheet to fair value and
transferred the accumulated deficit of $14,094 to capital in excess of par.
Per share data for the periods are based upon the weighted average number of
common shares outstanding during such periods. Outstanding common stock options
have not been included in the computation of earnings per share as their
exercise would not have a material dilutive effect.
Total interest paid for the six months ended June 30, 1995 and 1994 was $1,024
and $1,204 respectively. The Company had net income tax payments of $51 and $30
for the six months ended June 30, 1995 and 1994, respectively.
NOTE 2 - DISCONTINUED OPERATIONS
--------------------------------
Effective September 30, 1994, the Company adopted a plan to dispose of all of
its Electronic Components business. The disposal is being accounted for as a
discontinued operation, and, accordingly, the related net assets and operating
results have been reported separately from continuing operations. During 1995,
the Company sold the remaining product line of this business for $1,500. The
loss from operations of the discontinued Electronic Components business in 1995
of $64 was charged to reserves established in the prior year for anticipated
operating losses until disposal.
7
<PAGE>
VERNITRON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands)
NOTE 3 - INVENTORIES
--------------------
Inventories have been determined generally by lower of cost (first-in, first-out
or average) or market. Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- ------------
<S> <C> <C>
Raw materials $ 2,922 $ 2,551
Work-in-process 5,526 5,879
Finished goods 7,320 6,097
--------- -------
$15,768 $14,527
--------- -------
--------- -------
</TABLE>
NOTE 4 - OTHER INFORMATION
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- ------------
<S> <C> <C>
Allowance for doubtful accounts $ 325 $ 345
--------- -------
--------- -------
Accumulated depreciation and amortization
of property, plant and equipment $ 4,338 $ 3,662
--------- -------
--------- -------
Accumulated amortization of excess of cost
over net assets acquired $ 731 $ 627
--------- -------
--------- -------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollars in thousands)
RESULTS OF OPERATIONS
---------------------
Net sales by product group were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1995 1994 1995 1994
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Motion Control $ 6,407 $ 6,596 $13,047 $ 12,566
Industrial Components 10,447 9,240 20,703 18,199
--------- -------- -------- --------
Net Sales $ 16,854 $15,836 $33,750 $30,765
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
QUARTER ENDED JUNE 30, 1995 COMPARED TO THE QUARTER ENDED JUNE 30, 1994
-----------------------------------------------------------------------
Net sales for the second quarter of 1995 increased by $1,018, or 6%,
compared to the same period in 1994.
The Motion Control group's sales (motors, sensors and controls) decreased
slightly in 1995 by $189, or 3%, as compared to 1994. This decrease was
primarily due to lower shipments of synchros resulting from a consolidation of
inventory at Government depots and manufacturing and purchasing inefficiencies
affecting the resolver and motor product lines. These inefficiencies are
considered temporary and should be corrected in the third quarter of 1995.
These lower sales were partially offset by higher electromagnetic sub-system
sales resulting from new product introductions which did not begin to generate
significant sales volume until the second half of 1994 and higher potentiometer
sales resulting from greater operating efficiencies due to changes in product
line management and the relocation of the product line from Deer Park, New York
to St. Petersburg, Florida during the first quarter of 1994. Bookings were
$7,194 in the second quarter of 1995, an increase of $2,349, or 48%, compared to
the comparable quarter in 1994, primarily due to higher foreign bookings for
industrial resolvers resulting from an increased focus on foreign market
opportunities, higher motor orders resulting from new Government program awards,
and higher potentiometer orders due to improved sales/marketing management. The
nature of the Motion Control group's bookings results in an uneven pattern from
quarter to quarter and does not necessarily reflect overall business trends.
Backlog at June 30, 1995 was $14,216, compared to $12,621 at December 31, 1994.
The Industrial Components group's sales (bearings and connectors) increased
in 1995 by $1,207, or 13%, compared to 1994. Sales of bearings and connectors
were up by 10% and 17%, respectively, primarily due to new and increased
activity with original equipment manufacturers ("OEM's") and the introduction of
new and/or enhanced products. Industrial Component's bookings for the quarter
were $10,102, an increase of $452, or 5%, compared to 1994. This increase is
primarily in bearings and is due to increased OEM activity. Backlog at June 30,
1995 was $11,268, compared to $10,387 at December 31, 1994.
9
<PAGE>
Operating income was $1,095 in 1995, as compared to $1,122 in 1994,
representing a $27 decrease. This decrease was primarily due to lower gross
margins resulting from an unfavorable sales mix in both business groups and
higher raw material costs in the Industrial Components group as well as higher
selling, general and administrative expenses. These unfavorable variances were
partially offset by the gross margin earned on the incremental Industrial
Components group sales. Overall, gross margin on sales was 27.6% in 1995, down
from 28.2% in 1994. However, productivity, as measured by value-added per
employee, increased 8% to approximately $18.7 in 1995 from approximately $17.4
in 1994.
Selling, general and administrative expenses increased by $203 in 1995
primarily due to higher medical costs and the addition of sales personnel.
Interest expense declined by $112 in 1995 as a result of lower average
borrowings due primarily to the repurchase of the Company's bank indebtedness at
a discount in the third quarter of 1994. This was partially offset by higher
interest rates.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1994
-----------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Net sales for the first half of 1995 increased by $2,985, or 10%, compared
to the same period in 1994.
The Motion Control group's sales (motors, sensors and controls) increased
in 1995 by $481, or 4%, as compared to 1994. This increase was primarily due
to higher electromagnetic sub-system sales resulting from new product
introductions which did not begin to generate significant sales volume until the
second half of 1994 and higher potentiometer sales resulting from greater
operating efficiency in the current period (see discussion of quarter ended June
30, 1995). These higher shipments were partially offset by lower shipments of
synchros resulting from a consolidation of inventory at Government depots, lower
resolver sales due to the shipment of certain large orders in the first quarter
of 1994 and manufacturing and purchasing inefficiencies effecting the resolver
and motor product lines. Bookings were $14,642 in 1995, an increase of $3,009,
or 26%, compared to 1994, primarily due to higher foreign orders for industrial
resolvers and higher motor and potentiometer orders. The nature of the Motion
Control group's bookings results in an uneven pattern from quarter to quarter
and does not necessarily reflect overall business trends.
The Industrial Components group's sales (bearings and connectors) increased
in 1995 by $2,504, or 14%, compared to 1994. Sales of bearings and connectors
were up by 13% and 14%, respectively. Industrial Component's bookings were
$21,584, an increase of $2,224, or 12%, compared to 1994. Both the increase in
sales and bookings reflect favorable economic conditions (particularly in the
first quarter of 1995), new and increased activity with OEM's and the
introduction of new and/or enhanced products.
Operating income was $2,097, in 1995, as compared to $1,669 in 1994,
representing a $428 increase. This increase was primarily due to the gross
margin earned on the incremental sales volume
10
<PAGE>
in both business groups and cost reductions in the Motion Control group
resulting from restructuring actions completed during 1994, which were partially
offset by an unfavorable sales mix in the Motion Control group, higher raw
material costs in the Industrial Components group and higher selling, general
and administrative expenses. Overall, gross margin on sales was 27.6 % in 1995,
up from 26.7% in 1994. Productivity, as measured by value-added per employee,
increased 16% to approximately $37.6 in 1995 from approximately $32.4 in 1994.
Selling, general and administrative expenses increased by $673 in 1995
primarily due to higher medical costs, the addition of sales personnel and the
reinstatement of certain profit sharing provisions.
Interest expense declined by $217 in the first half of 1995 as a result of
lower average borrowings due primarily to the repurchase of the Company's bank
indebtedness at a discount in the third quarter of 1994. This was partially
offset by higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company believes that its $17.5 million credit facility and cash
generated from operations will be sufficient to meet its future capital
expenditure and working capital requirements and required debt amortization.
The Company had no material commitments for capital expenditures as of June
30, 1995.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
None
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 4, 1995 VERNITRON CORPORATION
By: /s/ Stephen W. Bershad
--------------------------
Stephen W. Bershad
Chief Executive Officer
By: /s/ Raymond F. Kunzmann
--------------------------
Raymond F. Kunzmann
Vice President - Finance, Controller
and Chief Financial Officer
12
<PAGE>
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF VERNITRON CORPORATION AS OF JUNE 30, 1995 AND THE RELATED STATEMENTS OF
OPERATIONS FOR THE QUARTERS ENDED AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS 3-MOS
[FISCAL-YEAR-END] DEC-31-1995 DEC-31-1995
[PERIOD-START] JAN-01-1995 APR-01-1995
[PERIOD-END] JUN-30-1995 JUN-30-1995
[CASH] 84 84
[SECURITIES] 0 0
[RECEIVABLES] 9,814 9,814
[ALLOWANCES] 325 325
[INVENTORY] 15,768 15,768
[CURRENT-ASSETS] 25,957 25,957
[PP&E] 12,089 12,089
[DEPRECIATION] 4,338 4,338
[TOTAL-ASSETS] 42,102 42,102
[CURRENT-LIABILITIES] 11,491 11,491
[BONDS] 13,312 13,312
[COMMON] 125 125
[PREFERRED-MANDATORY] 0 0
[PREFERRED] 7 7
[OTHER-SE] 14,150 14,150
[TOTAL-LIABILITY-AND-EQUITY] 42,102 42,102
[SALES] 33,750 16,854
[TOTAL-REVENUES] 33,750 16,854
[CGS] 24,424 12,210
[TOTAL-COSTS] 24,424 12,210
[OTHER-EXPENSES] 7,229 3,549
[LOSS-PROVISION] 0 0
[INTEREST-EXPENSE] 1,037 541
[INCOME-PRETAX] 1,045 547
[INCOME-TAX] 408 214
[INCOME-CONTINUING] 637 333
[DISCONTINUED] 0 0
[EXTRAORDINARY] 0 0
[CHANGES] 0 0
[NET-INCOME] 637 333
[EPS-PRIMARY] .03 .02
[EPS-DILUTED] .03 .02
</TABLE>
<PAGE>
ANNEX A
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VERNITRON CORPORATION
EFFECTING THE AMENDMENT
AND RESTATEMENT OF THE
CERTIFICATE OF THE DESIGNATION, POWERS,
PREFERENCES AND RIGHTS OF THE $1.20 CUMULATIVE
EXCHANGEABLE REDEEMABLE PREFERRED STOCK
PAR VALUE $0.01 PER SHARE
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
WHEREAS, the Board of Directors of Vernitron Corporation, a Delaware
corporation (the "Corporation"), is authorized, within the limitations and
restrictions stated in the Certificate of Incorporation, to amend and restate by
resolution or resolutions the designation of each series of Preferred Stock and
the powers, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, including,
without limiting the generality of the foregoing, such provisions as may be
desired concerning voting, redemption, dividends, dissolution or the
distribution of assets, conversion or exchange, and such other subjects or
matters as may be fixed by resolution or resolutions of the Board of Directors
under the General Corporation Law of the State of Delaware; and
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to amend and restate the terms of a
series of such Preferred Stock, constituting such series:
NOW, THEREFORE, BE IT RESOLVED:
(1) DESIGNATION AND NUMBER OF SHARES. The designation of said series of
Preferred Stock, par value $0.01 per share (the "Series Preferred Stock"),
authorized by this resolution shall be "$0.40 Cumulative Exchangeable Redeemable
Preferred Stock" (the "Exchangeable Preferred Stock"). The number of shares of
Exchangeable Preferred Stock authorized hereby shall be 600,000.
(2) RANK. The Exchangeable Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution, rank (a)
junior to any other series of the Series Preferred Stock established by the
Board of Directors, the terms of which shall specifically provide that such
series shall rank prior to the Exchangeable Preferred Stock (any such other
securities are referred to herein collectively as the "Senior Securities"), (b)
on a parity with any other series of the Series Preferred Stock established by
the Board of Directors, the terms of which shall specifically provide that such
series shall rank on a parity with the Exchangeable Preferred Stock (the
Exchangeable Preferred Stock and any such other securities are referred to
herein collectively as the "Parity Securities"), and (c) prior to any other
equity securities of the Corporation, including the Common Stock, par value $.01
per share, of the Corporation (the "Common Stock", all of such equity securities
of the Corporation to which the Exchangeable Preferred Stock ranks prior,
including the Common Stock, are referred to herein collectively as the "Junior
Securities").
<PAGE>
(3) DIVIDENDS. (a) The holders of the shares of Exchangeable Preferred
Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of funds legally available for the payment of dividends,
cumulative dividends at the annual rate of $0.40 per share, payable once a year
only, commencing with the first anniversary after the first of the following to
occur after the consummation of the Exchange Offer ("Exchange Offer") relating
to the $1.20 Cumulative Exchangeable Redeemable Preferred Stock par value $.01
per share (the "Effective Date"), (i) the fifteenth day of the month in which
the Effective Date occurs or (ii) the first day of the following month, and on
each anniversary thereof (each of such dates being a "dividend payment date"),
in preference to dividends on the Junior Securities. Such dividends shall be
paid to the holders of record at the close of business on the date specified by
the Board of Directors of the Corporation at the time such dividend is declared;
PROVIDED, HOWEVER, that such date shall not be more than 60 days nor less than
10 days prior to the respective dividend payment date. Each of such dividends
(whether payable in cash or in stock) shall be fully cumulative and shall accrue
(whether or not declared), without interest, from the first day in which such
dividend may be payable as herein provided, except that with respect to the
first dividend, such dividend, with respect to any share of Exchangeable
Preferred Stock outstanding immediately after the Effective Date, shall accrue
at the annual dividend rate from August 16, 1995, and with respect to any other
share of Exchangeable Preferred Stock which becomes outstanding after the
Effective Date, shall accrue from the date of issue of such share at the annual
dividend rate. Any dividend payments due with respect to the Exchangeable
Preferred Stock on any dividend payment date on or prior to March 1, 2001 may be
made, in the sole discretion of the Corporation, in cash or by issuing
additional fully paid and nonassessable shares of Exchangeable Preferred Stock
at the rate of 0.02 of one share for each $.10 of such annual dividend not paid
in cash; PROVIDED, HOWEVER, that in lieu of issuing fractional additional shares
in payment of such dividends the Corporation may pay to the person otherwise
entitled to such fractional share cash in the amount of $5 multiplied by the
amount of such fraction. The issuance of such additional shares or the issuance
of such additional shares together with the payment of cash in lieu of the
issuance of any fractional additional shares shall constitute full payment of
such dividend for all purposes hereof, including paragraph 3(f).
(b) All dividends paid with respect to shares of the Exchangeable
Preferred Stock pursuant to paragraph (3)(a) shall be paid pro rata to the
holders entitled hereto.
(c) In the event the Corporation pays the holders of the Exchangeable
Preferred Stock cash in lieu of the issuance of fractional additional shares,
the Corporation may aggregate such fractional additional shares into whole
shares of Exchangeable Preferred Stock and issue and sell such whole shares of
Exchangeable Preferred Stock.
(d) Notwithstanding anything contained herein to the contrary, no cash
dividends on shares of the Exchangeable Preferred Stock (other than the payment
of cash in lieu of the issuance of fractional additional shares), the Parity
Securities or the Junior Securities shall be declared by the Board of Directors
or paid or set apart for payment by the Corporation at any time that the terms
or provisions of any indenture or agreement of the Corporation, including any
agreement relating to its indebtedness, specifically prohibits such declaration,
payment or setting apart for payment or that such declaration, payment or
setting apart for payment would constitute (after notice or lapse of time or
otherwise) a breach of or a default under any such indenture or agreement;
PROVIDED, HOWEVER, that nothing herein contained shall in any way or under any
circumstances be construed or deemed to require the Board of Directors to
declare or the Corporation to pay or set apart for payment any cash dividends or
shares of the Exchangeable Preferred Stock at any time, whether permitted by any
of such agreements or not.
(e) (i) If at any time the Corporation shall have failed to pay full
dividends which have accrued (whether or not declared) on any Senior Securities,
no cash dividend (other than the payment of cash in lieu of the issuance of
fractional additional shares) shall be declared by the Board of Directors or
paid or set apart for payment by the Corporation on shares of the Exchangeable
Preferred Stock or any other Parity Securities unless, prior to or concurrently
with such declaration, payment or setting apart for payment, all accrued and
unpaid dividends on all
A-2
<PAGE>
outstanding shares of such other prior series of the Series Preferred Stock
shall have been or be declared and paid or set apart for payment, without
interest. No full dividends shall be declared or paid or set apart for payment
on any Parity Securities for any period unless full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Exchangeable Preferred
Stock for all dividend payment periods terminating on or prior to the date of
payment of such full cumulative dividends. If any dividends are not paid in
full, as aforesaid, upon the shares of the Exchangeable Preferred Stock and any
other Parity Securities, all dividends declared upon shares of the Exchangeable
Preferred Stock and any other Parity Securities shall be declared pro rata so
that the amount of dividends declared per share on the Exchangeable Preferred
Stock and such other Parity Securities shall in all cases bear to each other the
same ratio that accrued dividends per share on the Exchangeable Preferred Stock
and such other Parity Securities bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Exchangeable Preferred Stock or any other Parity Securities
which may be in arrears.
(ii) The Corporation shall not declare, pay or set apart for payment any
dividend on any of the Exchangeable Preferred Stock or make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the purchase, redemption or other retirement of, any of the Exchangeable
Preferred Stock or any warrants, rights, calls or options exercisable for or
convertible into any of the Exchangeable Preferred Stock, or make any
distribution in respect thereof, either directly or indirectly, and whether in
cash, obligations or shares of the Corporation, or other property (other than
distributions or dividends in shares of Exchangeable Preferred Stock (including
the payment of cash in lieu of the issuance of fractional shares of Exchangeable
Preferred Stock) to the holders thereof), and shall not permit any corporation
or other entity directly or indirectly controlled by the Corporation to purchase
or redeem any of the Exchangeable Preferred Stock or any warrants, rights, calls
or options exercisable for or convertible into any of the Exchangeable Preferred
Stock, unless prior to or concurrently with such declaration, payment, setting
apart for payment, purchase or distribution, as the case may be, all accrued and
unpaid dividends on shares of any Senior Securities shall have been or be duly
paid in full and all redemption payments which have become due with respect to
such Senior Securities shall have been or be duly discharged.
Any dividend not paid pursuant to paragraph (3)(a) hereof or this paragraph
(3)(e) shall be fully cumulative and shall accrue (whether or not declared),
without interest, as set forth in paragraph (3)(a) hereof.
(f) (i) Holders of shares of the Exchangeable Preferred Stock shall be
entitled to receive the dividends provided for in paragraph (3)(a) hereof in
preference to and in priority over any dividends upon any of the Junior
Securities.
(ii) The Corporation shall not declare, pay or set apart for payment any
dividend on any of the Junior Securities or make any payment on account of, or
set apart for payment money for a sinking or other similar fund for, the
purchase, redemption or other retirement of any of the Junior Securities or any
warrants, rights, calls or options exercisable for or convertible into any of
the Junior Securities or make any distribution in respect thereof, either
directly or indirectly, and whether in cash, obligations or shares of the
Corporation, or other property (other than distributions or dividends in Junior
Securities to the holders of Junior Securities), and shall not permit any
corporation or other entity directly or indirectly controlled by the Corporation
to purchase or redeem any of the Junior Securities unless, prior to or
concurrently therewith, all accrued and unpaid dividends on shares of the
Exchangeable Preferred Stock not paid on the dates provided for in paragraph
(3)(a) hereof (including if not paid pursuant to the terms and conditions of
paragraph (3)(a), paragraph (3)(d) or paragraph (3)(e) hereof) shall have been
or be paid; provided, however, that the provisions of this paragraph shall not
prevent the expenditure of up to an aggregate of $300,000 for Permitted Employee
Redemptions or the payment of any dividend within sixty days after the date of
declaration thereof, if at such date of declaration such payment complied with
the provisions hereof. For purposes of this paragraph and paragraph (5)(e)
hereof, "Permitted Employee Redemption" shall mean any purchase or redemption by
the Corporation or any of its Subsidiaries on or after the Effective Date of
Junior Securities (or warrants, options or rights to acquire any Junior
Securities) from any officer or employee (or former officer or employee) of the
Corporation or any of its Subsidiaries. "Subsidiary" is an corporation or other
entity of
A-3
<PAGE>
which at least a majority of the capital stock having ordinary power for the
election of directors is owned by the Corporation directly or through one of
more Subsidiaries.
(g) Subject to the foregoing provisions of this Section (3) and the
provisions of paragraph (5)(e), the Board of Directors may declare, and the
Corporation may pay or set apart for payment, dividends and other distributions
on any of the Junior Securities, and may purchase or otherwise redeem any of the
Junior Securities or any warrants, rights or options exercisable for or
convertible into any of the Junior Securities, and the holders of the shares of
the Exchangeable Preferred Stock shall not be entitled to share therein.
(4) LIQUIDATION PREFERENCE. (a) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the holders of shares of Exchangeable Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders an amount in cash equal to $5 for
each share outstanding, plus an amount in cash equal to all accrued but unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding up,
before any payment shall be made or any assets distributed to the holders of any
of the Junior Securities; PROVIDED, HOWEVER, that the holders of outstanding
shares of the Exchangeable Preferred Stock shall not be entitled to receive such
liquidation payment until the liquidation payments on all outstanding shares of
Senior Securities, if any, shall have been paid in full. If the assets of the
Corporation are not sufficient to pay in full the liquidation payments payable
to the holders of outstanding shares of the Exchangeable Preferred Stock or any
other Parity Securities, then the holders of all such shares shall share ratably
in such distribution of assets in accordance with the amount which would be
payable on such distribution if the amounts to which the holders of outstanding
shares of Exchangeable Preferred Stock and the holders of outstanding shares of
such other Parity Securities are entitled were paid in full.
(b) The liquidation payment with respect to each fractional share of the
Exchangeable Preferred Stock outstanding or accrued but unpaid shall be equal to
a ratable proportionate amount of the liquidation payment with respect to each
outstanding share of Exchangeable Preferred Stock.
(c) For the purposes of this Section (4), neither the voluntary sale,
conveyance, lease, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all the property or assets of
the Corporation nor the consolidation or merger of the Corporation with one or
more other corporations shall be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, unless such voluntary sale, conveyance,
lease, exchange or transfer shall be in connection with a dissolution or winding
up of the business of the Corporation.
(5) REDEMPTION. From and after the Effective Date, the Corporation at its
option may redeem, to the extent funds are legally available therefor, the
Exchangeable Preferred Stock, at any time in whole or from time to time in part,
at a price of $5.00 per share or Fair Value Per Share, in either case together
with an amount equal to accrued and unpaid dividends thereon to the date fixed
for redemption, without interest. The Corporation shall not optionally redeem
the Exchangeable Preferred Stock or any other Parity Securities, in whole or in
part, without redeeming, on a pro rata basis, shares of all outstanding series
of Parity Securities (including the Exchangeable Preferred Stock) in accordance
with the relative amounts which the holders of such Parity Securities would be
entitled to receive upon liquidation, if paid in full, pursuant to paragraph
(4)(a). "Fair Value Per Share" means, on any date of determination, the average
of the daily closing prices per share of Exchangeable Preferred Stock for the 10
consecutive New York Stock Exchange trading days commencing 15 New York Stock
Exchange trading days before such date. The closing price for each day shall be
the last sale price regular way or, in case no such sales take place on such
day, the closing bid price regular way, in either case on the New York Stock
Exchange Composite Tape, or, if the Exchangeable Preferred Stock is not listed
or admitted to trading on any national securities exchange, the highest reported
bid price as furnished by the National Association of Securities Dealers, Inc.
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information. If the
A-4
<PAGE>
Exchangeable Preferred Stock is not reported on NASDAQ or any such similar
organization, Fair Value Per Share shall mean the fair value per share of the
Exchangeable Preferred Stock as determined by the Board of Directors of the
Company.
(b) Shares of Exchangeable Preferred Stock which have been issued and
reacquired in any manner, including shares purchased or redeemed or exchanged,
shall (upon compliance with any applicable provisions of the laws of the State
of Delaware) have the status of authorized and unissued shares of the class of
Series Preferred Stock, undesignated as to series, and may be redesignated and
reissued as part of any series of the Series Preferred Stock, par value $.01 per
share, of the Corporation; provided, however, that no such issued and reacquired
shares of Exchangeable Preferred Stock shall be reissued or sold as Exchangeable
Preferred Stock unless reissued as a stock dividend on shares of Exchangeable
Preferred Stock.
(c) Notwithstanding the foregoing provisions of this Section (5), unless
the full cumulative dividends on all outstanding shares of Exchangeable
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Exchangeable Preferred
Stock shall be redeemed unless all outstanding shares of Exchangeable Preferred
Stock are simultaneously redeemed, and the Corporation shall not purchase or
otherwise acquire (except pursuant to Section (6) hereof) any shares of
Exchangeable Preferred Stock; PROVIDED, HOWEVER, that the foregoing shall not
prevent the purchase or acquisition of shares of Exchangeable Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Exchangeable Preferred Stock.
(d) No redemption shall be made pursuant to paragraph (5)(a), and no sum
shall be set aside for any such redemption unless, at the time thereof, (i) all
accrued dividends payable on any Senior Securities, if any, then outstanding,
(ii) all mandatory redemptions of any such Senior Securities, if any, then
required and (iii) all optional redemptions of any such Senior Securities, if
any, previously declared, shall in each case have been paid in full.
(e) No redemption shall be made pursuant to paragraph (5)(a) and no sum
shall be set aside for any such redemption at any time that the terms or
provisions of any indenture or agreement of the Corporation, including any
agreement relating to its indebtedness, specifically prohibits such redemption
or setting aside for redemption or that such redemption or setting aside for
redemption would constitute (after notice or lapse of time or otherwise) a
breach of or a default under any such indenture or agreement.
(6) EXCHANGE. From and after the date occurring six months after the
Effective Date, the Exchangeable Preferred Stock is exchangeable, at the option
of the Corporation and to the extent permitted by applicable law, at any time in
whole or from time to time in part, on any dividend payment date for the 8%
Subordinated Debentures due 2002 (the "Debentures") to be issued pursuant to the
indenture, dated as of April 28, 1982, by and between the Corporation and Bank
of Montreal Trust Company, as Trustee, a copy of which is on file with the
Secretary of the Corporation (the "Indenture"), as amended by that certain
supplemental indenture to be entered into by the Corporation and the Trustee on
substantially the terms described in the Offering Circulars and Consent
Solicitations, dated June 20, 1991 and September [ ], 1995, of the
Corporation (such supplemental indenture, in the form on file with the Secretary
of the Corporation, together with the Indenture, the "Amended Indenture");
PROVIDED, HOWEVER, that the Corporation may only exchange shares of the
Exchangeable Preferred Stock pursuant to this Section (6) having an aggregate
liquidation value of not less than $500,000; PROVIDED, FURTHER, that if all
shares of Exchangeable Preferred Stock outstanding have an aggregate liquidation
value of less that $500,000, then the Corporation may exchange all of such
shares. Holders of the outstanding shares of Exchangeable Preferred Stock will
be entitled to receive, on the date fixed for exchange, Debentures in a
principal amount equal to the aggregate liquidation preference of all shares of
Exchangeable Preferred Stock held by them being exchanged; PROVIDED, HOWEVER,
that in the event any such issuance of Debentures in exchange for shares of
Exchangeable Preferred Stock would result in the issuance of any Debentures in a
principal amount which is not $5 or an integral multiple of $5 (such principal
amount, if less than $5, or, if such principal amount is greater than $5, the
A-5
<PAGE>
difference between such principal amount and the highest integral multiple of $5
which is less than such principal amounts, is hereinafter referred to as the
"Fractional Principal Amount"), the Corporation may pay to the persons otherwise
entitled to Fractional Principal Amounts of Debentures a payment of cash in lieu
thereof equal to the Fractional Principal Amount each such person otherwise
would have been entitled to receive. On the date fixed for any such exchange,
the rights of the holders of Exchangeable Preferred Stock so exchanged as
stockholders of the Corporation shall cease and the person or persons entitled
to receive the Debentures issuable upon exchange shall be treated for all
purposes as the registered holder or holders of such Debentures. In accordance
with Section (7) hereof, the Corporation will mail to each record holder of
Exchangeable Preferred Stock written notice of its intention to exchange not
less than 30 days nor more than 60 days prior to the exchange. Prior to giving
notice of its intention to exchange, the Corporation shall execute with and
deliver to a bank or trust company selected by the Corporation the Amended
Indenture with such changes as may be required by stock exchange rules, laws or
usage or as may be agreed to by the Corporation and the holders of a majority of
the then outstanding shares of the Exchangeable Preferred Stock. The
Corporation will cause the Amended Indenture to be qualified under the Trust
Indenture Act of 1939, as amended, and will cause the Debentures to be
authenticated as of the date on which the exchange is effective, which date
shall be such dividend payment date. Notwithstanding the foregoing, the
Corporation may not exchange any shares of Exchangeable Preferred Stock at any
time that the terms or provisions of any indenture or agreement of the
Corporation, including any agreement relating to its indebtedness, specifically
prohibits such exchange or that such exchange constitutes or, after notice or
lapse of time or otherwise, would constitute a breach of or a default under any
such indenture or agreement.
(7) PROCEDURE FOR REDEMPTION OR EXCHANGE. (a) In the event that fewer
than all the outstanding shares of Exchangeable Preferred Stock are to be
redeemed or exchanged, the number of shares to be redeemed or exchanged shall be
determined by the Board of Directors and the shares to be redeemed or exchanged
shall be determined by lot or pro rata as may be determined by the Board of
Directors, except that in any redemption or exchange of fewer than all
outstanding shares of the Exchangeable Preferred Stock the Corporation may
redeem or exchange all shares held by any holders of a number of shares not to
exceed 100 as may be determined by the Corporation.
(b) In the event the Corporation shall redeem or exchange shares of
Exchangeable Preferred Stock, notice of such redemption or exchange shall be
given by first class mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the redemption or exchange date, to each holder of
record of the shares to be redeemed or exchanged at such holder's address as the
same appears on the stock register of the Corporation; PROVIDED, HOWEVER, that
no failure to mail such notice nor any defect therein shall affect the validity
of the proceeding for the redemption or exchange of any shares of Exchangeable
Preferred Stock to be redeemed or exchanged except as to the holder to whom the
Corporation has failed to mail said notice or except as to the holder whose
notice was defective. Each such notice shall state: (i) the redemption or
exchange date; (ii) the number of shares of Exchangeable Preferred Stock to be
redeemed or exchanged and, if less than all the shares held by such holder are
to be redeemed or exchanged from such holder, the number of shares to be
redeemed or exchanged from such holder; (iii) the redemption or exchange price;
(iv) the place or places where certificates for such shares are to be
surrendered for payment of the redemption or exchange price; and (v) that
dividends on the shares to be redeemed or exchanged will cease to accrue on such
redemption or exchange date.
(c) Notice having been mailed as aforesaid, from and after the redemption
or exchange date (unless, in the case of redemptions, default shall be made by
the Corporation in providing money for the payment of the redemption price of
the shares called for redemption) dividends on the shares of Exchangeable
Preferred Stock so called for redemption or exchange shall cease to accrue, and
said shares shall no longer be deemed to be outstanding and shall have the
status of authorized but unissued shares of Series Preferred Stock, unclassified
as to series, and shall not be reissued as shares of Exchangeable Preferred
Stock (unless reissued as a stock dividend on Exchangeable Preferred Stock), and
all rights of the holders thereof as stockholders of the Corporation with
respect to said shares (except the right to receive from the Corporation the
redemption price or the Debentures upon exchange) shall cease. Upon surrender
in accordance with said notice of the certificates for any shares so
A-6
<PAGE>
redeemed or exchanged (properly endorsed or assigned for transfer, if the Board
of Directors of the Corporation shall so require and the notice shall so state),
such shares shall be redeemed or exchanged by the Corporation at the redemption
or exchange price aforesaid. In case fewer than all the shares represented by
any such certificate are redeemed or exchanged, a new certificate shall be
issued representing the unredeemed or unexchanged shares without cost to the
holder thereof.
(d) The Corporation may, at its option, request and cause the trustee
under the Amended Indenture to issue to it upon the date fixed for any exchange
of shares of Exchangeable Preferred Stock, Debentures in an aggregate principal
amount equal to $5 multiplied by all of the Fractional Principal Amounts which
have not been issued upon the exchange. The Corporation may then sell such
Debentures on the open market or privately.
(8) VOTING RIGHTS. The holders of record of shares of Exchangeable
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section (8) or as otherwise provided by law.
(a) If and whenever at any time or times either (i) dividends payable on
the Exchangeable Preferred Stock shall have been in arrears and unpaid in an
aggregate amount equal to or exceeding the amount of dividends payable thereon
for six (6) quarterly periods or (ii) the Corporation shall have failed to make
any mandatory redemption as required in respect of the Exchangeable Preferred
Stock, then the number of directors constituting the Board of Directors shall,
without further action, be increased by one-third (1/3) (but not less than two
directors) and the holders of Exchangeable Preferred Stock shall have the
exclusive right, voting separately as a class, to elect the directors of the
Corporation to fill such newly created directorships, the remaining directors to
be elected by the other class or classes of stock entitled to vote therefor, at
each meeting of stockholders held for the purpose of electing directors.
(b) Whenever such voting right shall have vested, such right may be
exercised initially either at a special meeting of the holders of the
Exchangeable Preferred Stock, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at such annual meetings or by the written consent of the holders of
the Exchangeable Preferred Stock entitled to vote thereon pursuant to Section
228 of the Delaware General Corporation Law. Such voting right shall continue
until such time as (i) all cumulative dividends accumulated on the Exchangeable
Preferred Stock shall have been paid in full, and (ii) all sinking fund
obligations with respect to the Exchangeable Preferred Stock which have matured
have been met, at which time such voting right of the holders of the
Exchangeable Preferred Stock shall terminate, subject to revesting in the event
of each and every subsequent event of the character indicated above.
(c) At any time when such voting right shall have vested in the holders of
the Exchangeable Preferred Stock, and if such right shall not already have been
initially exercised, a proper officer of the Corporation shall, upon the written
request of any holder of record of Exchangeable Preferred Stock then
outstanding, addressed to the Secretary of the Corporation, call a special
meeting of holders of the Exchangeable Preferred Stock having such voting right
and of any other class or classes of stock having voting power with respect
thereto for the purpose of electing directors. Such meeting shall be held at
the earliest practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders of the
Corporation or, if none, at a place designated by the Secretary of the
Corporation. If such meeting shall not be called by the proper officer of the
Corporation within 30 days after the personal service of such written request
upon the Secretary of the Corporation, or within 30 days after mailing the same
within the United States, by registered mail, addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by the
registry receipt issued by the postal authorities), then the holders of record
of 10% of the shares of the Exchangeable Preferred Stock then outstanding which
would be entitled to vote at such meeting may designate in writing a holder of
Exchangeable Preferred Stock to call such meeting at the expense of the
Corporation, and such meeting may be called by such person so designated upon
the notice required for annual meetings of stockholders and shall be held at the
same place as is elsewhere provided in this paragraph (8)(c). Any holder of the
Exchangeable Preferred Stock which
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would be entitled to vote at such meeting shall have access to the stock books
of the Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to the provisions of this paragraph (8)(c). Notwithstanding the
provisions of this paragraph (8)(c), however, no such special meeting shall be
called during a period within 90 days immediately preceding the date fixed for
the next annual meeting of stockholders.
(d) At any meeting held for the purpose of electing directors at which the
holders of Exchangeable Preferred Stock shall have the right to elect directors
as provided herein, the presence in person or by proxy of the holders of 33 1/3%
of the then outstanding shares of Exchangeable Preferred Stock shall be required
and be sufficient to constitute a quorum of such class for the election of
directors by such class. At any such meeting or adjournment thereof (i) the
absence of a quorum of the holders of the Exchangeable Preferred Stock shall not
prevent the election of directors other than those to be elected by the holders
of the Exchangeable Preferred Stock and the absence of a quorum or quorums of
the holders of capital stock entitled to elect such other directors shall not
prevent the election of directors to be elected by the holders of the
Exchangeable Preferred Stock and (ii) in the absence of a quorum of the holders
of any class of stock entitled to vote for the election of directors, a majority
of the holders present in person or by proxy of such class shall have the power
to adjourn the meeting for the election of directors which the holders of such
class are entitled to elect, from time to time, without notice (except as
required by law) other than announcement at the meeting, until a quorum shall be
present.
(e) The term of office of all directors elected by the holders of the
Exchangeable Preferred Stock pursuant to paragraph (8)(a) in office at any time
when the aforesaid voting rights are vested in the holders of the Exchangeable
Preferred Stock shall terminate upon the election of their successors at any
meeting of stockholders for the purpose of electing directors. Upon any
termination of the aforesaid voting rights, the term of office of all directors
elected by the holders of the Exchangeable Preferred Stock pursuant to paragraph
(8)(a) shall thereupon terminate and upon such termination the number of
directors constituting the Board of Directors shall, without further action, be
reduced by the number of directors by which the number of directors constituting
the Board of Directors shall have been increased pursuant to paragraph (8)(a),
subject always to the increase of the number of directors pursuant to paragraph
(8)(a) in case of the future right of the holders of Exchangeable Preferred
Stock to elect directors.
(f) In exercising the voting rights set forth in this Section (8), each
share of Exchangeable Preferred Stock shall have one vote per share.
(g) So long as any shares of Exchangeable Preferred Stock are outstanding,
the Corporation shall not, without the affirmative vote of the holders of at
least a majority of the then outstanding shares of Exchangeable Preferred Stock
voting separately as a class, change by amendment to the Corporation's
Certificate of Incorporation or otherwise, the terms or provisions of the
Exchangeable Preferred Stock so as to adversely affect the powers, special
rights and preferences of the holders thereof.
(h) No consent of holders of the Exchangeable Preferred Stock shall be
required for (i) the creation, authorization or issuance of any indebtedness of
any kind of the Corporation, (ii) the creation, authorization or issuance of any
other class of stock of the Corporation senior, PARI PASSU or subordinate as to
dividends or upon liquidation to the Exchangeable Preferred Stock or (iii) any
increase or decrease in the amount of authorized Common Stock or Series
Preferred Stock or any increase, decrease or change in the par value thereof,
and none of the foregoing shall be deemed to affect adversely the powers,
special rights or preferences of holders of Exchangeable Preferred Stock.
(9) AMENDMENT OF RESOLUTION. The Board of Directors of the Corporation
reserves the right by subsequent amendment of this resolution from time to time
to decrease the number of shares which constitute the Exchangeable Preferred
Stock (but not below the number of shares thereof then outstanding) and in other
respects
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to amend this resolution within the limitations provided by law, this resolution
and the Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, Vernitron Corporation has caused this Certificate to be
signed by its Chairman of the Board and Chief Executive Officer and attested by
its Secretary this day of , 1995.
VERNITRON CORPORATION
By:
-------------------------------------
Stephen W. Bershad
Chairman of the Board and
Chief Executive Officer
ATTEST:
-------------------------------------
Secretary
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<PAGE>
ANNEX B
DESCRIPTION OF PREFERRED STOCK AND JUNIOR DEBENTURES
PREFERRED STOCK
GENERAL. The following summary of certain provisions of the Preferred
Stock does not purport to be complete and is qualified in its entirety by the
provisions of the Preferred Stock Certificate. There are 1,400,000 authorized
shares of the Preferred Stock. The Preferred Stock ranks junior in right of
payment to all indebtedness of the Company and any capital stock ranking senior
to the Preferred Stock. The terms of the Preferred Stock do not restrict the
incurrence of indebtedness by the Company or the issuance by the Company or any
class or series of capital stock, whether or not senior to the Preferred Stock.
DIVIDENDS. Each share of Preferred Stock bears cumulative
dividends, at the rate of $1.20 per annum, payable quarterly. Such dividends
are payable to the holders of record at the close of business on the date (not
more than 60, nor less than 10, days prior to the respective dividend payment
date) specified by the Board of Directors at the time the dividend is declared.
Any dividend payable on or prior to March 1, 1996 is payable at the option of
the Company in cash or in additional shares of Preferred Stock. Dividends in
additional shares of Preferred Stock are payable at the rate of 0.0125 shares
for each $0.10 of such quarterly dividends not paid in cash. Fractional shares
of Preferred Stock may be issued in payment of dividends, or cash may be paid in
lieu of fractional shares. In such event, the amount of cash payable will be
determined by multiplying the market value of a share of Preferred Stock at the
applicable record date by such fractional share. After March 1, 1996, holders
of Preferred Stock will be entitled to receive dividends payable quarterly
entirely in cash when and as declared by the Board of Directors. All dividends
not paid in cash or in additional shares of Preferred Stock, whether or not
declared, cumulate, without interest, until declared and paid, which declaration
and payment may be for all or part of the then accumulated dividends. Payment
of cash dividends on the Preferred Stock will likely be subject to certain
restricted payments provisions contained in the Company's financing agreements.
The Preferred Stock provides that so long as any shares of the
Preferred Stock are outstanding, the Company may not declare, pay or set apart
for payment any dividend on the Common Stock or any other class of capital stock
of the Company ranking junior to the Preferred Stock (the "Junior Securities")
or make any payment on account of, or set apart for payment money for a sinking
or other similar fund for, the purchase, redemption or other retirement of any
of the Junior Securities or any warrants, options or rights to acquire any of
the Junior Securities or make any distribution in respect thereof, either
directly or indirectly, and whether in cash, obligations or shares of the
Company, or other property (other than distributions or dividends in Junior
Securities to the holders of Junior Securities), and may not permit any
corporation or other entity directly or indirectly controlled by the Company to
purchase or redeem any of the Junior Securities or any warrants, options or
rights to acquire any of the Junior Securities, if there are any unpaid
dividends on the Preferred Stock. Without limitation, the issuance of
additional shares of Preferred Stock as a dividend on the Preferred Stock which
is payable on or prior to March 1, 1996 shall constitute full payment of any
such dividend. The foregoing restrictions shall not prevent the payment of any
dividend within sixty days after the date of declaration thereof if at such date
of declaration such payment complied with the provisions hereof or the
expenditure of up to an aggregate of $300,000 for Permitted Employee
Redemptions. "Permitted Employee Redemption" means any purchase or redemption
by the Company or any of its subsidiaries of Junior Securities (or warrants,
options or rights to acquire any Junior Securities) from any officer or employee
(or former officer or employee) of the Company or any of its subsidiaries.
<PAGE>
REDEMPTION AND EXCHANGE. The Preferred Stock is redeemable (subject to the
legal availability of funds and any restrictions contained in the Company's
financing agreements), at the option of the Company, in whole or in part at any
time, at a redemption price of either $8.00 per share, together with all accrued
and unpaid dividends to the redemption date, or 110% of Fair Value Per Share (as
defined), together with all accrued but unpaid dividends to the redemption date.
The Fair Value Per Share on any date of determination is the average of the
daily closing prices per share of Preferred Stock for the 10 consecutive New
York Stock Exchange trading days commencing 15 New York Stock Exchange trading
days before such date. The closing price for each day shall be the last sale
price regular way or, in case no such sale takes place on such day, the average
of the closing bid and asked prices regular way, in either case on the New York
Stock Exchange Composite Tape, or, if the Preferred Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Preferred Stock is listed or admitted to trading, or if
the Preferred Stock is not listed or admitted to trading on any national
securities exchange, the average of the highest reported bid and lowest reported
asked prices as furnished by the National Association of Securities Dealers,
Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting
such information. If the Preferred Stock is not reported on NASDAQ or any such
similar organization, Fair Value Per Share shall mean the fair value per share
of the Preferred Stock as determined by the Board of Directors of the Company.
Optional redemptions of the Preferred Stock are subject to restricted payment
provisions in the Company's financing agreements. See "Credit Agreement."
The Preferred Stock is exchangeable (subject to the legal availability of
funds) on any dividend payment date in whole or in part (in minimum increments
of $500,000), at the option of the Company, for Junior Debentures in an amount
equal to the sum of the aggregate liquidation preference of all shares of the
Preferred Stock being exchanged into Junior Debentures. The Company has no
present intention to exercise its option to cause shares of Preferred Stock to
be exchanged for Junior Debentures in the foreseeable future. The Company may
not exchange any shares of Preferred Stock unless (a) no event of default exists
under any of the Company's financing agreements and (b) the exchange is allowed
under the provisions of the Company's financing agreements. If only a portion
of the outstanding shares of Preferred Stock are to be exchanged for Junior
Debentures, either the number of shares to be redeemed will be allocated among
all holders proportionately, or holders whose shares are to be redeemed will be
selected by lot. If the latter selection procedure were followed, some holders
may have all their shares exchanged for Junior Debentures, while other holders
may not have any of their shares of Preferred Stock exchanged. A partial
exchange could have adverse effects on the liquidity of the market for the
Preferred Stock or Junior Debentures, as well as the market prices for such
securities.
In the event such exchange would result in the issuance of an Junior
Debenture in a principal amount which is less than $8.00 or which is not an
integral multiple of $8.00, the Company may pay to persons otherwise entitled to
fractional principal amounts of Junior Debentures a payment in cash in lieu
thereof equal to the fractional principal amount each such person would have
otherwise been entitled to receive in Junior Debentures.
NO VOTING RIGHTS. The Preferred Stock has no voting rights, except that,
if at any time dividends on the Preferred Stock are not paid for six quarters,
or the Company fails to meet any mandatory redemption obligation with respect to
the Preferred Stock, the Company's Board of Directors will be increased by one-
third (but not less than two directors) and the holders of Preferred Stock will
be entitled to elect the directors to fill such newly created directorships. In
addition, the affirmative vote of the holders of at least a majority of the
outstanding shares of Preferred Stock, voting separately as a class, is required
for the authorization of changes, by amendment to the Company's Certificate of
Incorporation or otherwise, to the terms and provisions of the Preferred Stock
so as to adversely affect the rights and preferences of the Preferred Stock.
See "-- Restrictions on Mergers."
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of Preferred Stock will be
entitled to receive $8.00 per share, plus any accrued and unpaid dividends,
before any distribution is made on any Junior Securities.
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<PAGE>
RESTRICTIONS ON MERGERS. Any merger or consolidation of the Company with
or into another corporation requires the affirmative vote of a majority of the
outstanding Preferred Stock voting as a class if, as a result thereof, (i) the
terms of the Preferred Stock are materially adversely changed; (ii) any
Replacement Securities (as defined) are not substantially the same as the
Preferred Stock; or (iii) the terms of the Junior Debentures are materially
adversely changed or the terms of the securities for which the Preferred Stock
or Replacement Securities are exchangeable are not substantially the same as set
forth in the Indenture.
JUNIOR DEBENTURES
GENERAL. The Junior Debentures, if and when issued, will represent
unsecured subordinated general obligations of the Company and will be issued in
registered form only, without coupons, pursuant to an indenture, dated as of
August 28, 1987 as amended (the "Indenture"), between the Company and The Bank
of Montreal, as trustee (the "Trustee"). The Indenture is qualified under the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The terms
of the Junior Debentures will include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act as in effect
on the date of the Indenture. The Junior Debentures are subject to all such
terms, and reference is made to the Indenture and the Trust Indenture Act for a
statement thereof. The following statements relating to the Junior Debentures
and the Indenture, are summaries of certain provisions of the Junior Debentures
and the Indenture, do not purport to be complete and are subject to and
qualified in their entirety by reference to the provisions of the Junior
Debentures and the Indenture, including the definitions therein of certain
terms. The Indenture and the form of the Junior Debentures are available from
the Company in the manner set forth under "Additional Information." As used in
this section, the term the "Company" does not include any of the Company's
subsidiaries, unless the context otherwise requires. All other capitalized
terms used in this section and not otherwise defined in this section or
elsewhere in this Offering Circular have the meanings given such terms in the
Indenture.
The aggregate principal amount of the Junior Debentures, if and when
issued, will equal the aggregate liquidation preference of the shares of
Preferred Stock exchanged therefor, plus accrued and unpaid dividends, plus any
additional Junior Debentures which may be issued in payment of interest due on
outstanding Junior Debentures. The Junior Debentures, if issued will be a new
issue of securities with no established trading market. There can be no
assurance that a trading market will develop and no prediction is made as to the
prices at which the Junior Debentures will trade if a trading market develops.
If a trading market for the Junior Debentures develops, the Junior Debentures
may trade at a discount from their face amount. Under the Indenture, Junior
Debentures issued in exchange for Preferred Stock and as payment of interest on
outstanding Junior Debentures on any given date may be issued as a separately
designated series from Junior Debentures issued on other dates. Other than such
differing designations as to their respective series, all Junior Debentures,
whenever issued, will have identical terms, including interest payment dates,
maturity date and redemption provisions. However, different series of Junior
Debentures may be deemed to have been issued with differing amounts of original
issue discount for tax purposes, and each series may trade separately in the
secondary market. Such separate trading could adversely affect the liquidity of
any particular series of Junior Debentures. The Junior Debentures will be
issued in registered form, without coupons. The Company will issue Junior
Debentures only in denominations of $8.00 and integral multiples thereof.
In the event that an exchange of Preferred Stock for Junior Debentures or
the issuance of additional Junior Debentures in payment of interest on
outstanding Junior Debentures otherwise would result in the issuance of
Fractional Principal Amounts of Junior Debentures, the Company will pay to the
person otherwise entitled to such Fractional Principal Amounts of Junior
Debentures a payment in cash in lieu thereof equal to the Fractional Principal
Amounts each such person otherwise would have been entitled to receive in Junior
Debentures.
INTEREST PAYMENTS; MATURITY. The Junior Debentures will bear interest at
the rate of 15% per annum, payable semi-annually. The Junior Debentures will
mature on the first interest payment date after August 28,
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2002. The Company may pay principal and interest by its check and may mail an
interest check to a holder's registered address. Holders must surrender Junior
Debentures to a Paying Agent to collect payments of principal.
REDEMPTION. The Junior Debentures are redeemable at any time, in whole or
in part, at the election of the Company, at 100% of the principal amount
thereof, in each case plus accrued interest to the date of redemption. On the
first interest payment date after August 28, 1998 through, and on the first
interest payment date after each subsequent anniversary of August 28, 1998
through and including the fourteenth anniversary, the Company will be required
to redeem a principal amount of Junior Debentures equal to the product of (i)
20% of the Aggregate Preferred Stock Liquidation Value and the Aggregate Junior
Debenture Principal Amount multiplied by (ii) a fraction the numerator of which
is the aggregate principal amount of Junior Debentures outstanding as of such
redemption date, in the case of the first mandatory redemption, or as of the
time immediately after the immediately preceding redemption date, in the case of
each subsequent mandatory redemption, and the denominator of which is the Total
Merger Securities Face Amount as of such redemption date or time, as the case
may be. For purposes of the foregoing formula, the terms "Aggregate Preferred
Stock Liquidation Value," "Aggregate Junior Debenture Principal Amount" and
"Total Merger Securities Face Amount" have the same meanings as under the
Preferred Stock Certificate. The Company may reduce the principal amount of
Junior Debentures it is required to so redeem by subtracting 100% of the
principal amount of Junior Debenture purchased or redeemed (other than through
the operation of the mandatory redemption provisions) and delivered to the
Trustee for cancellation.
SUBORDINATION. The Junior Debentures are subordinated to and subject in
right of payment to the prior payment in full of the principal of, premium, if
any, and interest on all Senior Debt of the Company. The Indenture does not
limit Senior Debt or any other debt, secured or unsecured, of the Company or any
of its Subsidiaries. "Senior Debt" means all other indebtedness of the Company,
whether outstanding on the date of issuance of the Junior Debentures or
thereafter created, incurred, assumed or guaranteed (a) for money borrowed from
or guaranteed to others or (b) created, incurred, assumed or guaranteed by the
Company in connection with the acquisition by it or a Subsidiary of any
properties or assets, including securities, and, in each case, all renewals,
extensions and refundings thereof, unless in each case, by the terms of the
instrument created or evidencing the indebtedness it is provided that such
indebtedness is not senior in right of payment to the Junior Debentures.
"Senior Debt" will include, but not be limited to indebtedness under the Credit
Agreement. On December 31, 1994, the Company's Senior Debt was $12,363,000.
Upon maturity (by acceleration or otherwise) of any Senior Debt, payment in full
on the Senior Debt must be made or duly provided for before any payment is made
on or with respect to the Junior Debentures. No payment of principal of or
interest on the Junior Debentures may be made if (a) a default in payment of any
Senior Debt occurs, is continuing, and has not been cured or waived; (b) the
Company received notice that any other default or event of default under Senior
Debt has occurred, and such default or event of default is continuing and has
not been cured or waived; or (c) payment of principal of and interest on the
Junior Debentures has been accelerated pursuant to the Indenture while any
amounts are owing on any Senior Debt. Upon any distribution of assets of the
Company in any liquidation, dissolution or reorganization of the Company,
payment of the principal of and interest on the Junior Debentures will be
subordinated, to the extent and in the manner set forth in the Indenture, to the
prior payment in full of all Senior Debt. If, in any of the situations referred
to above, a payment (other than a Defeasance Payment, as hereinafter defined) is
made to the Trustee or to holders of Junior Debentures before all Senior Debt
has been paid in full or provision has been made for such payment, the payment
to the Trustee or the holders of Junior Debentures must be paid over to the
holders of Senior Debt. Claims of trade and other creditors of the Company's
subsidiaries will have priority with respect to the assets and earnings of such
subsidiaries to the claims of creditors of the Company, even though such
obligations do not constitute Senior Debt.
RESTRICTIONS ON DIVIDENDS. The Indenture provides that the Company may not
make any declaration, payment or setting apart for payment of any dividend,
distribution, purchase, redemption or other retirement on or of any of the
Junior Securities or of any warrants, rights, calls or options exercisable for
any of the Junior
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<PAGE>
Securities, directly or indirectly, and whether in cash, obligations, shares of
the Company or property (other than distributions or dividends in Junior
Securities to the holders of such Junior Securities), (1) at any time during the
period of which the Company has the option of paying interest on the Junior
Debentures in Junior Debentures; or (2) thereafter, if at the time of such
action a Default or an Event of Default (both as defined in the Indenture) shall
have occurred and be continuing, or a Default or an Event of Default shall occur
as a consequence thereof, or if, upon giving effect thereto, the aggregate
amount expended for all such purposes subsequent to the Effective Date shall
exceed the sum of (w) 50% of the aggregate Consolidated Net Income of the
Company and its Subsidiaries accrued on a cumulative basis after August 28,
1987, plus (x) the aggregate net proceeds, including cash and the fair market
value of property other than cash, received by the Company from the issue or
sale of Junior Securities (other than the proceeds form the substantially
concurrent sale of Junior Securities used to retire any Junior Securities) after
August 28, 1987, less (y) dividends accrued on the Preferred Stock after August
28, 1987 and less (z) $2,000,000. Such restrictions will not prevent the
expenditure of up to an aggregate of $300,000 for Permitted Employee
Redemptions. For purposes of determining the "amount expended" for such
purposes, property other than cash will be valued at the fair market value of
such property. The "fair market value" of any property other than cash will be
determined by the Company's Board of Directors.
RESTRICTIONS ON MERGERS. Other than the Merger, the Company may not
consolidate with or merge with or into another corporation unless (i) the
Company is the successor corporation or the successor corporation is organized
in the United States and expressly assumes all the obligations of the Company
under the Indenture; (ii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing.
EVENTS OF DEFAULT AND REMEDIES. The term "Event of Default" when used in
the Indenture means any of the following: (1) a failure of the Company to pay
(whether or not prohibited by the subordination provisions of the Indenture) any
installment of interest on the Junior Debentures for 30 days after such
installment is due; (ii) default in payment of principal or premium, if any,
when the same becomes due, whether at maturity, upon redemption or otherwise
(whether or not prohibited by the subordination provisions of the Indenture);
(iii) default in performance of any other covenant of the Company in the
Indenture or the Junior Debentures for 60 days after notice to the Company by
the Trustee or to the Company and the Trustee by the holders of 25% in principal
amount of the outstanding Junior Debentures; or (iv) certain events of
bankruptcy, insolvency or reorganization of the Company.
The Indenture that the Trustee shall, within 90 days after the occurrence
of a Default or Event of Default, give to the holders of Junior Debentures
notice of all uncured defaults known to it, provided that, except in the case of
default in the payment of principal of or interest on any of the Junior
Debentures, the Trustee shall be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in the interest of
such holders. If an Event of Default (other than certain events of bankruptcy,
insolvency or reorganization) occurs and is continuing, the Trustee or the
holders of at least 25% in aggregate principal amount of the Junior Debentures
then outstanding, but notice in writing to the Company (and to the Trustee if
such notice is given by the holders of Junior Debentures) may, and the Trustee
at the request of such holders of Junior Debentures shall, declare the principal
of and accrued interest on the Junior Debentures to be immediately due and
payable. Upon the occurrence of an Event of Default due to certain events of
bankruptcy, insolvency or reorganization of the Company the Junior Debentures
shall become immediately due and payable, without any action by the trustee or
any holder of Junior Debentures. Such declaration may be annulled and past
defaults (except, unless theretofore cured or waived by the consent of each
holder affected, a default in payment of principal of or interest on the Junior
Debentures or the failure to make any required redemption payment on the Junior
Debentures) may be waived by the holders of at least a majority in aggregate
principal amount of the Junior Debentures then outstanding, upon the conditions
provided in the Indenture. The Indenture includes a covenant that the Company
will file annually with the Trustee a statement regarding compliance by the
Company with the terms thereof and specifying any
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defaults of which the signers may have knowledge. The Company will annually
furnish to each holder copies of its financial statements certified by
independent public accountants.
TRANSFER AND EXCHANGE. A holder may transfer or exchange Junior Debentures
in accordance with the Indenture. The registrar under the Indenture may require
a holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture. The registrar is not required to (i) transfer or exchange any Junior
Debenture selected for redemption or (ii) exchange Junior Debentures which are
in principal amounts of $8.00 or an integral multiple thereof if the result of
such exchange would be to cause the issuance of Junior Debentures in
denominations of less than $8.00 or an integral multiple thereof. The
registered holder of a Junior Debenture may be treated as the owner of it for
all purposes.
MODIFICATION OF THE INDENTURE. Under the Indenture, the rights and
obligations of the Company and the rights of holders of the Junior Debentures
may be modified by the Company and the Trustee only with the Consent of at least
a majority in aggregate principal amount of the Junior Debentures then
outstanding, except that without the consent of each holder of Junior Debentures
affected thereby, no modification or change may reduce the principal of or
extend the maturity of any Junior Debenture or alter the redemption provisions
thereof; waive a default in the payment of principal of or interest on any
Junior Debenture; reduce the rate of or extend the time for payment of interest
thereon; or reduce the amount of Junior Debentures whose holders must consent to
a waiver or amendment of the Indenture. Subject to the foregoing limitations,
the holders of a majority in aggregate principal amount of the Junior Debentures
may waive compliance by the Company with any provisions of the Indenture or the
Junior Debentures.
SATISFACTION AND DISCHARGE OF THE INDENTURE. The Indenture will cease to
be of further effect as to all outstanding Junior Debentures, and the Company
will be deemed to have paid and discharged its entire indebtedness on all the
outstanding Junior Debentures, when all outstanding Junior Debentures (except
lost, stolen or destroyed Junior Debentures which have been replaced or paid and
Junior Debentures for whose payment money has been deposited in trust) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable by it under the Indenture. If the Company irrevocably deposits or
causes to be deposited in trust with the Trustee (a "Defeasance Payment") cash
or U.S. Government Obligations (as defined in the Indenture) sufficient to
timely pay and discharge the entire principal of and interest on the then
outstanding Junior Debentures to maturity or redemption, and to pay all other
sums payable by it under the Indenture, and if such deposit does not violate the
subordination provisions of the Indenture, the Indenture shall cease to be of
further effect as to all outstanding Junior Debentures (except, among other
things, as to (i) remaining rights of registration of transfer, substitution and
exchange of Junior Debentures; (ii) rights of holders to receive payment of
principal of an interest on the Junior Debentures; and (iii) the rights,
obligations and immunities of the Trustee), and the Company shall be deemed to
have paid and discharged the entire indebtedness on all the outstanding Junior
Debentures.
THE TRUSTEE. The Indenture contains certain limitations on the right of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee is permitted to engage
in other transactions with the Company; however, if it acquires any conflicting
interest, as defined in the Trust Indenture Act, it must eliminate such conflict
or resign.
Subject to certain limitations, the holders of a majority in principal
amount of Junior Debentures then outstanding will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee, provided that such direction does not conflict with
any rule of law or with the Indenture. The Indenture provides that, if an Event
of Default shall occur (which shall not be cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers
B-6
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under the Indenture at the request of any of the holders of Junior Debentures
unless they shall have offered to the Trustee indemnity satisfactory to it.
B-7
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ANNEX C
COMPARISON OF NEW SECURITIES TO OLD SECURITIES
THE FOLLOWING IS A BRIEF COMPARISON OF THE PRINCIPAL FEATURES OF THE
PREFERRED STOCK TO THE AMENDED PREFERRED STOCK AND COMMON STOCK AND OF THE
JUNIOR DEBENTURES TO THE AMENDED JUNIOR DEBENTURES. SUCH COMPARISONS ARE
SUMMARIES WHICH DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE DESCRIPTIONS SET FORTH IN THE OFFERING CIRCULAR OF
THE PREFERRED STOCK, THE AMENDED PREFERRED STOCK, COMMON STOCK, PREFERRED STOCK
CERTIFICATE, PREFERRED STOCK AMENDMENT, JUNIOR DEBENTURES, THE INDENTURE AND THE
RELATED DEFINITIONS CONTAINED THEREIN.
<TABLE>
<CAPTION>
PREFERRED STOCK AMENDED PREFERRED STOCK COMMON STOCK
--------------- ----------------------- ------------
<S> <C> <C> <C>
1. Liquidation preference $8.00 per share. $5.00 per share. No preference.
2. Annual dividend rate $1.20 per share, payable on a $0.40 per share, payable once No stated amount.
quarterly basis. a year.
3. Ability to pay dividends Expires on March 1, 1996. Expires on March 1 , 2001. Not applicable.
in additional shares
instead of cash
4. Mandatory redemption None. None. None.
5. Optional redemption In whole or in part at any Same, except that Fair Value
time at a price of either $8 Per Share definition None.
per share or 110% of the Fair modified.
Value Per Share (as defined),
together with all accrued and
unpaid dividends to the
redemption date.
6. Exchange Each share of Preferred Stock Each share of Amended
is exchangeable on any Preferred Stock is None.
dividend payment date, at the exchangeable on any dividend
option of the Company, into payment date, at the option
$8 principal amount of Junior of the Company, into $5
Debentures. principal amount of Amended
Junior Debentures.
7. Ranking The Preferred Stock is junior Same as Preferred Stock.
to all debt. The Preferred Junior to all debt and other
ranks senior to all Junior capital stock.
Stock (as defined), pari
passu with all Parity Stock
(as defined) and junior to
all Senior Stock (as
defined).
8. Voting One vote per share, but only Same as Preferred Stock.
in the event that dividends One vote per share on all
on the Preferred Stock are matters, including the
unpaid for six quarterly election of directors, other
periods, or if the Company than directors which holders
fails to make any required of Preferred Stock, or
mandatory redemption Amended Preferred Stock,
payments. In such event, the voting as a class, are
Board will be increased by entitled to elect.
one-third (not less than two
directors) and the holders of
Preferred Stock, voting as a
class will be entitled to
elect such additional
directors to an expanded
Board. Such voting rights
will continue until such time
as all dividends accumulated
on the Preferred Stock are
paid in full. The affirmative
vote of the holders of at
least a majority of the
outstanding Amended Preferred
Stock, voting as a class, is
required for the authorization
of changes to, the Preferred
Stock Certificate, as amended
by the Preferred Stock
Amendment, which adversely
affect the rights and
preferences of the Amended
Preferred Stock.
<PAGE>
<CAPTION>
PREFERRED STOCK AMENDED PREFERRED STOCK COMMON STOCK
--------------- ----------------------- ------------
<S> <C> <C> <C>
9. Certain Restrictions No payment on, purchase, Same as Preferred Stock. Not applicable.
redemption or retirement of
the Junior Stock (or any
rights in respect of Junior
Stock) or distributions (in
cash or property) permitted
if all accrued and unpaid
dividends on the Amended
Preferred Stock have not been
or will not be concurrently
paid; provided that up to
$300,000 may be expended on
Permitted Employee
Redemptions (as defined)
notwithstanding the
foregoing.
Any merger or consolidation
needs the affirmative vote of
a majority of the outstanding
Preferred Stock voting as a
class if, as a result
thereof, (i) the terms of the
Preferred Stock are
materially adversely changed;
(ii) any Replacement
Securities (as defined) are
not substantially the same as
the Preferred Stock; or (iii)
the terms of the Junior
Debentures are materially
adversely changed or the
terms of the securities for
which the Preferred Stock or
Replacement Securities are
exchangeable are not
substantially the same as set
forth in the Indenture.
C-2
<PAGE>
<CAPTION>
JUNIOR DEBENTURES AMENDED JUNIOR DEBENTURES
----------------- -------------------------
<S> <C> <C>
1. Denominations $8.00 per Junior Debenture. $5.00 per Amended Junior Debenture.
2. Annual interest rate 15%, payable on a semi-annual basis. 8%, payable on a semi-annual basis.
3. Ability to pay interest in Expires on September 1, 1992. Same.
additional debentures instead of
cash
4. Maturity Matures on the first interest payment Same.
date after August 28, 2002.
5. Mandatory redemption None. None.
6. Optional redemption In whole or in part as follows: after Same
August 28, 1990 and prior to August 28,
1991, at 110% of the principal amount;
after August 28, 1991 and prior to
August 28, 1992, at 105% of the
principal amount; and thereafter, at
100% of the principal amount.
7. Subordination The Junior Debentures are subordinated Same.
to all Senior Debt (as defined).
8. Certain Restrictions No payments of any dividends or Same.
distributions on, or any purchase or
redemption of any Junior Securities (as
defined), or rights in respect of Junior
Securities, in cash or property is
permitted if (A) the Company has the
option to pay interest on the Junior
Debentures in Junior Debentures; or (B)
such action results in a Default or
Event of Default (both as defined) or a
Default or Event of Default has occurred
and is continuing; or (C) the aggregate
amount of all such payments exceeds the
sum of 50% Consolidated Net Income (as
defined) PLUS the proceeds from the sale
of Junior Securities (other than to
retire Junior Securities) less dividends
accrued on the Preferred Stock and less
$2,000,000. Such restriction will not
prohibit up to $300,000 of Permitted
Employee Redemptions (as defined).
Same.
The Company may not merge or consolidate
with or into another corporation unless
(i) the successor is the Company or a
U.S. corporation; and (ii) after giving
effect thereto, there is no Default or
Event of Default.
C-3
<PAGE>
<CAPTION>
JUNIOR DEBENTURES AMENDED JUNIOR DEBENTURES
----------------- -------------------------
<S> <C> <C>
9. Events of Default Events of Default include (i) default in Same
payment of interest for 30 days; (ii)
any default in principal payment when
due (regardless of subordination); (iii)
covenant default for 60 days after
notice by Trustee or by holders of 25%
of outstanding Junior Debentures; (iv)
certain events of bankruptcy.
10. Modification Indenture may be modified upon consent Same
of a majority of outstanding Junior
Debentures.
</TABLE>
C-4
